Money markets performed well during a quarter filled with economic disappointments and negative market tone. Investor anxiety fueled demand for safe assets, including Treasury bills and money funds. Industry assets reached a new record, reinforcing the product’s widespread appeal. 

The economic drumbeat turned distinctly bearish during the first quarter as US unemployment rose, payroll growth weakened, and the housing market worsened. Consumer confidence, employment, inflation, durable goods, and retail sales were all weak. Home sales and prices slipped while mortgage delinquencies rose. Oil and food prices, along with the sagging US dollar drove inflation higher. Nervousness about inflation pushed gold to record highs.  

Both the private sector and the government responded with urgency. Banks and insurers raised capital to bolster their balance sheets and deter ratings downgrades. Congress hurriedly passed a fiscal stimulus bill, and regulators eased capital rules on government-sponsored entities in support of the mortgage market. Amid the negative sentiment, and under intense criticism, the Federal Reserve Board swallowed its inflation fears and chopped its target funds rate a cumulative 200 basis points. More importantly, it created two credit facilities to provide stigma-free funding to banks and brokers—helping them to liquefy their troubled securities. 

The economic slippage highlights the strengths of the money market sector. Liquidity continues to improve after last year's credit crunch, with spreads on the London Interbank rate (LIBOR) and asset-backed commercial paper narrowing significantly. Problems at the monoline bond insurers have had little direct impact on our funds. We intend to keep quality and liquidity as our top investment priorities.