Regular issues of Treasury bills backed by central government have the lowest default risk, creating the deepest market segment of homogeneous, highly liquid paper - with consequently the lowest yield. This is because governments are generally assumed to have a very low default risk.
Bankers' Acceptances are also very safe investments as they carry the obligation to honour payment by both a corporate and a bank, and in addition, because they usually represent a business transaction with specific underlying goods.
Certificates of Deposit, honoured by a single bank, generally trade a few basis points higher, but this can only be a generalisation as the market segment is itself tiered; the range of names issuing resulting in different credit and liquidity premiums.
The Commercial Paper segment presents the greatest degree of tiering. Prime grade CP generally trades a few basis points over CDs, but again, some corporates are perceived as being more creditworthy than some banks. Medium grade CP offers the highest yields to attract investors.
A distinct market
The ability of borrowers and lenders to choose between alternative money market instruments results in a close relationship between the return offered by those different instruments.
So although, technically, a money market is a collection of markets for several distinct instruments - the interrelationship between these various forms of short-term debt finance create a distinct market. This market's primary use is what is known as, liquidity management. Let's see what it is.