Can Bond Proceeds Be Invested in Money Market Funds?

Bond proceeds can sit in a money market fund where the state's investment statute lists funds, the bond documents accept them and the arbitrage rules are met.

The state statutes that name money market funds directly include those of Texas, California, Florida, Illinois, Ohio, Massachusetts, Colorado and New Jersey, while Virginia and Michigan authorize registered funds limited to what state law allows.

Each layer carries its own conditions: SEC Rule 2a-7 defines the funds, the state statutes attach ratings, load, portfolio and concentration requirements, and the issue's bond documents and the arbitrage rules sit on top of both.

Funds are the pooled-vehicle family of reinvestment products for bond proceeds, alongside investment agreements and owned securities.

The broader question of what proceeds may be invested in belongs to the permitted investments guide, and this page stays on the funds themselves.

Which investments a particular issue may use is a conclusion for bond counsel and tax counsel, reading the statute, the bond documents and the arbitrage rules together.

Government or prime: which fund types does Rule 2a-7 define?

Rule 2a-7 sorts money market funds into government funds, retail funds and all other funds, and the category decides what the fund holds, which pricing methods it may use and which of the SEC's 2023 reforms reach it.

A government money market fund invests 99.5% or more of its total assets in cash, government securities and/or repurchase agreements that are collateralized fully, the definition at 17 CFR 270.2a-7(a)(14).

Government and retail funds may use amortized cost and penny rounding to maintain a stable price per share under 17 CFR 270.2a-7(c)(1), pricing methods the rule permits, not a guarantee of the share price.

A retail fund is one with policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons (17 CFR 270.2a-7(a)(21)), so a fund holding an issuer's bond proceeds would be a government fund or a fund without that natural-person limit rather than a retail one.

The SEC adopted money market fund reforms on July 12, 2023 that raised minimum liquidity requirements, removed the ability to impose redemption gates and removed the link between liquidity fees and weekly liquid asset thresholds.

Institutional prime and institutional tax-exempt funds must charge a liquidity fee when daily net redemptions exceed 5% of net assets, unless the fund's liquidity costs are de minimis, and non-government funds must charge a discretionary fee if the board finds it in the fund's best interest, per the SEC's release.

The mandatory fee does not reach government funds.

SEC Chair Gensler put money market fund assets at nearly $6 trillion when the reforms were adopted.

State law can add a screen of its own on the federal categories: New Jersey's P.L.2017, c.310, written before the SEC's 2023 amendments, defines a government money market mutual fund for local units as an SEC-registered 2a-7 fund that is rated, imposes no liquidity fees or redemption gates and is limited to U.S. Government securities, New Jersey local securities that are 2a-7 eligible, and repurchase agreements on them.

That same law defines local government investment pools against a separate standard, and pools are their own product covered under local government investment pools.

Which rating and portfolio conditions do state statutes attach to money market funds?

The states screen the funds through their own requirements, and the table shows each statute's conditions as that state wrote them.

Texas writes its rule around proceeds directly: Texas Government Code §2256.014(b) keeps bond proceeds, reserves and debt service funds out of the mutual funds that are not money market funds, which leaves the subsection (a) fund list as the relevant authorization.

Florida's structure shows what the written policy does: with one, the §218.415(16) list runs from the state trust fund and interlocal pools through funds with the highest credit quality rating, and without one, the §218.415(17) alternative list is shorter, though it still includes funds with the highest rating.

These statutes are written for public funds, and Ohio's for interim moneys, while some states carry separate rules for bond money, such as Cal. Gov't Code §53601(m), under which money held by a trustee or fiscal agent and pledged to bonds may be invested under the statute governing the issue or, where that statute is silent or to the extent consistent with it, under the ordinance, resolution, indenture or agreement providing for the issue, so the state's bond statutes and the bond documents can change the conditions shown here.

The state by state guides carry each state's full authorized-investment list.

How liquid are money market funds under Rule 2a-7?

Rule 2a-7 builds the liquidity into the fund: a fund cannot buy a non-daily-liquid asset if the purchase would leave it with less than 25% of total assets in daily liquid assets, and it cannot buy a non-weekly-liquid asset if that would leave it with less than 50% in weekly liquid assets (17 CFR 270.2a-7(d)(4)(ii)-(iii)).

The daily minimum does not apply to tax-exempt funds.

Those 25% and 50% levels are the post-2023 figures, the ones the SEC's July 12, 2023 reforms raised.

Rule 2a-7 also bounds maturity in a separate set of limits: no instrument with a remaining maturity over 397 calendar days, weighted average maturity of no more than 60 days and weighted average life of no more than 120 days.

For an issuer spending a construction fund against invoices, those floors shape the liquidity being bought, since access to the money follows the fund's own terms.

The spending plan comes first in that pairing, and the draw schedule page covers how an issuer builds one.

What do money market funds earn compared with fixed-rate agreements?

A fund's earnings follow a short portfolio, capped by Rule 2a-7 at 397-day instrument maturities and a 60-day weighted average maturity, while the MSRB glossary's general definition of a guaranteed investment contract (GIC) is an investment, secured by a contract with a financial institution, that guarantees a fixed rate of return and a fixed maturity.

The glossary definition is the general one, and bond-proceeds GICs often carry flexible draw schedules rather than a single fixed maturity.

Where proceeds have passed their temporary period, yield restriction limits tax-exempt proceeds to a yield not materially higher than the bond yield, a limit that stays put while a fund's earnings move with the market.

The arbitrage rules also classify funds on their own terms: 26 CFR 1.148-1(b) provides that an open-end regulated investment company, such as a mutual fund, is not a commingled fund, where a commingled fund otherwise means a fund holding gross proceeds plus more than $25,000 of other amounts invested collectively.

Treasury Regulation §1.148-5(e)(2)(ii) counts all reasonable administrative costs, including indirect costs, as qualified administrative costs for a publicly offered regulated investment company.

What those classifications do to a given issue's arbitrage position is a computation for tax counsel rather than a selling point for either vehicle.

A fund is bought at its share price rather than bid, while an investment agreement can be priced through a competitive solicitation, and issuers that take the agreement route can have mGIC bid it as an independent Bidding Agent.

Floating earnings against a fixed rate, with a draw schedule underneath, is its own comparison, and the money market fund vs GIC page works through it.

mGIC helps issuers evaluate and competitively bid GICs, full-flex repurchase agreements and structured portfolios of U.S. Treasury securities, the last of which can carry a money-market fund allocation for faster-than-expected spend-down.

How a fund sits alongside those agreements for a particular issue is what a no-obligation reinvestment review is for.

Which investments an issue may use, and what each holding does to the issue's tax position, is a determination for bond counsel and tax counsel.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.