Your money market fund is full of corporate IOUs. Here's what that actually means.
Most retail investors have never thought about commercial paper — but if you've ever kept cash in a money market fund at your brokerage, you've been using it without knowing it.
What it is: Short-term, unsecured corporate debt. A company needs cash for 30, 60, or 90 days to cover payroll, buy inventory, bridge a gap between revenue and expenses, but instead of going through the lengthy process of issuing a bond they issue commercial paper. Investors buy it at a slight discount and get paid back at face value when it matures.
Who buys it: Primarily money market funds. The yield on your idle brokerage cash comes mostly from T-bills and commercial paper held by the fund on your behalf.
Why only big companies can issue it: There's no collateral. It's backed purely by the issuer's reputation and balance sheet. The market won't lend 90-day unsecured money to a company it doesn't trust so this market belongs almost exclusively to large, highly-rated corporations.
Why it matters: The commercial paper market is one of the most important pieces of financial plumbing you've never thought about. When it seized up in 2008 and again briefly in March 2020, even healthy companies suddenly couldn't roll over short-term debt which is why, in part, the Fed intervened both times. When spreads on commercial paper spike, it's one of the earliest signs something is wrong in credit markets.
For retail investors, the practical takeaway is this: the "safe" cash sitting in your money market fund isn't just sitting there. It's working and the system it's working within is more complex, and more important than most people realize.
Part 3 of 4.