Short-Term “Enhanced Cash” Fund Goes Below Par

An article in Barron’s highlights that a short-term institutional bond fund run by GE Asset Management is offering investor’s the ability to redeem their holdings at 96 cents on the dollar. Short-Term bond funds such as this typically strive to maintain a NAV (net asset value) of $1.00 and provide a market yield. In an effort to enhance the returns, this particular fund took on what was thought to be mortgage debt with high credit ratings. As a result of the sub-prime mortgage fallout and the ensuing lockup in the credit markets, the NAV of the fund has fallen below $1.00, essentially erasing any yield.

This just about sums up what is going on in the credit markets. Holders of mortgage debt are at the mercy of credit markets which for the time being have severely discounted the value of such debt. Thus the value of government debt has greatly increased and nobody wants to touch mortgage debt, resulting in a situation which certainly does not bode well for real estate investors seeking leverage.

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