Aug. 16 (Bloomberg) -- Turmoil in global credit markets has sent investors fleeing to the safety of U.S. money-market funds, pushing assets to a record $2.65 trillion.

Investors poured $39.42 billion into money-market funds in the week ended Aug. 14, according to Money Fund Report, a Westborough, Massachusetts-based newsletter that tracks the industry. Average yields on taxable money funds are 4.76 percent, compared with 4.19 percent for two-year U.S. Treasury notes.

The crisis that began with overdue payments on U.S. subprime home loans, which reached a five-year high in the first quarter, has spread to most assets. Asset-back bonds, stocks and closed- end funds have all fallen.

``Money markets are the safest place to be,'' said Peter Crane, the founder of Crane Data LLC, a Westborough, Massachusetts-based publisher of the Money Fund Intelligence newsletter. ``You don't want to run out of your house to hide under the tree during a lightning storm.''

The MSCI Emerging Markets Index of stocks has fallen 16 percent in the past month, while the Standard and Poor's 500 Index of the largest U.S. companies declined 8.9 percent.

Money-market funds, considered to be among the safest investments, are required to hold debt with top ratings that matures in 13 months or less. Their prices are required to stay the same, so investors collect steady yield payments free of worries that volatile markets can destroy principle.

Short-Term Alternatives

The market turmoil has also affected closed-end funds and short-term alternatives to money funds, such as State Street Corp.'s SSga Yield Plus Fund and Fidelity Investments' Ultra- Short Bond Fund, which have lost 5.9 percent and 2.9 percent.

These money-market substitutes buy short-term debt, including subprime, and have fewer investment restrictions than money funds.

Sentinel Management Group Inc. froze client withdrawals from its short-term cash-management funds. Chicago-based Sentinel, which manages $1.6 billion for clients such as managed-futures funds and hedge funds, said lower prices have made it impossible for it to trade without taking losses.

Eaton Vance Corp.'s Tax-Managed Global Diversified Equity Income Fund, has fallen 24 percent. The fund, which started with $6 billion in assets to rank as largest closed-end fund, has since fallen 22 percent. Dividends closed-end portfolios pay investors can be threatened when their net asset values fall.

`Not Money Market Funds'

State Street's $188 million High Yield Plus Fund had 63 percent of assets in asset-backed securities, and 27 percent in mortgage-backed bonds, according to Morningstar Inc. in Chicago.

Fidelity's $974 million Ultra-Short Bond fund has 20 percent of its portfolio in BBB-rated securities, two notches above junk bonds. It has more than 23 percent in mortgage-linked securities, and 31 percent in asset-backed instruments, Morningstar said.

``These funds certainly make it clear that they are not money-market funds, and may lose principal,'' Russel Kinnel, an analyst at Morningstar, said yesterday in an interview. ``Essentially, these funds mostly had highly rated subprime, which we now know to be an oxymoron.''

As market volatility has pushed bond prices down, the extra yield investors demand to own non-investment-grade corporate bonds instead of Treasuries has risen to 427 basis points from a record low of 241 on June 5, Merrill Lynch & Co. data show. One basis point is equal to 0.01 percentage point.

`Widening of Risk Premiums'

``Market-driven events occur from time-to-time, such as the current liquidity constraints, and we actively address these events,'' with investors, Carolyn Cichon, a spokeswoman for Boston-based State Street, said.

Sophie Launay, a spokeswoman for Fidelity, also based in Boston, said that the fund's holdings in subprime securities have hurt the portfolio, along with ``widening of risk premiums'' in the bond market.

``The vast majority of the Fund's subprime mortgage securities were held in the higher-rated AAA and AA rated tranches,'' Launay said, while declining to give the specific percentage of fund assets in subprime.

Standard & Poor's, which assigns ratings to more than 450 money-market funds, said yesterday that less than a half dozen of them had invested in asset-backed commercial paper that have faced a liquidity crunch in the past week. It has not taken any rating actions on the funds.

Money-market funds are required to keep the value of each share at $1.

The only blowup of a money-market mutual fund happened in 1994, when the $100 million Community Bankers U.S. Government Money Market Fund in Denver was forced to liquidate assets at 4 cents on the dollar. That fund was invested in interest-rate derivatives, which have since been banned.

``The odds of money-market funds breaking the buck are virtually nil,'' Crane said, referring to the industry term for a money fund falling below its net asset value.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net;

Last Updated: August 16, 2007 17:14 EDT