It looks like the era of earning a nice risk-free 5% is over. The Federal Reserve hasn’t even lowered the Fed funds rate (the main driver of money market yields) from the current level of 5.25% and many good low fee money market funds are already yielding closer to 4%.
Uncertain times on Wall Street have sent even high-risk investors running for cover. Demand for the lowest of the low risk investments – U.S. Government Treasury bills – has sent yields way down. Today’s terrible jobs number and continued boo-scary foreclosure news has all but assured investors that interest rates are heading down fast and furious, lest the economy tailspin into a depression.
What this all means is a nice old fund like Vanguard Treasury Money Market Fund (VMPXX) yields 4.48%, 10% less than just a few weeks ago. Higher fee money market funds like T. Rowe Price U.S. Treasury Money (PRTXX) are now yielding 3.88%. As new money goes into these funds, their managers are forced to load up on lower yielding debt, which waters down the higher-yield holdings.
Interestingly, money market funds that own CD’s and commercial paper (highly rated, sort term debt backed by corporate America, not Uncle Sam) still yield around 5% (and higher). The perception is that this debt now has some risk - if not default risk than liquidity risk. Vanguard Prime Money Market Fund (VMMXX) yields 5.1%. Fidelity Cash Reserves (FDRXX) yields 5.11% - even more than it did a few months ago. Both funds tip the scales at about $100 billion in assets.
Apparently people don’t like seeing “Countrywide Financial Corp” in their money market portfolios anymore.
And there are some issues here. If investors panic sold Fidelity Cash Reserves, in all likelihood some would not get $1.00 per share – the price money market funds try to maintain. The manager probably couldn’t sell all that commercial paper at current prices.
So what’s a scaredy-cat yield-hound to do?
The best bet for the ultra risk averse is bank CDs. Unlike money market funds these FDIC insured (up to $100,000 per depositor per insured bank) accounts can’t be sold whenever you, want penalty free, but offer safe near 5% yields.
Also unlike money market mutual funds and short term bond funds, it doesn’t really matter what the bank does with your money (even if they make loans to questionable home buyers buying inflated condos) because the government will bail ‘em out. Just like the S&L Crisis…
It looks like the era of earning a nice risk-free 5% is over. The Federal Reserve hasn’t even lowered the Fed funds rate (the main driver of money market yields) from the current level of 5.25% and many good low fee money market funds are already yielding closer to 4%.
Uncertain times on Wall Street have sent even high-risk investors running for cover. Demand for the lowest of the low risk investments – U.S. Government Treasury bills – has sent yields way down. Today’s terrible jobs number and continued boo-scary foreclosure news has all but assured investors that interest rates are heading down fast and furious, lest the economy tailspin into a depression.
What this all means is a nice old fund like Vanguard Treasury Money Market Fund (VMPXX) yields 4.48%, 10% less than just a few weeks ago. Higher fee money market funds like T. Rowe Price U.S. Treasury Money (PRTXX) are now yielding 3.88%. As new money goes into these funds, their managers are forced to load up on lower yielding debt, which waters down the higher-yield holdings.
Interestingly, money market funds that own CD’s and commercial paper (highly rated, sort term debt backed by corporate America, not Uncle Sam) still yield around 5% (and higher). The perception is that this debt now has some risk - if not default risk than liquidity risk. Vanguard Prime Money Market Fund (VMMXX) yields 5.1%. Fidelity Cash Reserves (FDRXX) yields 5.11% - even more than it did a few months ago. Both funds tip the scales at about $100 billion in assets.
Apparently people don’t like seeing “Countrywide Financial Corp” in their money market portfolios anymore.
And there are some issues here. If investors panic sold Fidelity Cash Reserves, in all likelihood some would not get $1.00 per share – the price money market funds try to maintain. The manager probably couldn’t sell all that commercial paper at current prices.
So what’s a scaredy-cat yield-hound to do?
The best bet for the ultra risk averse is bank CDs. Unlike money market funds these FDIC insured (up to $100,000 per depositor per insured bank) accounts can’t be sold whenever you, want penalty free, but offer safe near 5% yields.
Also unlike money market mutual funds and short term bond funds, it doesn’t really matter what the bank does with your money (even if they make loans to questionable home buyers buying inflated condos) because the government will bail ‘em out. Just like the S&L Crisis…