Money Fund Yields

The money fund industry witnessed one of its biggest challenges ever last September when the Reserve Fund dropped their net asset value below $1 after absorbing losses on securities issued by Lehman Brothers. Heavy redemptions and worries about other high-profile funds brought money funds to the front pages of newspapers for perhaps the first time ever. The industry was calmed with the implementation of the temporary Treasury Guarantee Program, which federally guaranteed all money funds purchased before September 19, 2008 from companies participating in the program. After large companies like Fidelity, Vanguard, and Dreyfus were quick to pay the premiums and publicize the program, money funds were once again deemed “safe” by the financial media.

A new major challenge to the industry is how to overcome the low level of interest rates that exists in the United States after the Federal Reserve has dropped rates to close to zero. Companies offering money funds rely on a spread between what they earn on their portfolio and what they pay to investors. Fees and expenses, which can range from 0.2% to close to 1%, reduce the yield paid out on a money fund. Treasury-only funds, in which fund managers are limited from buying commercial paper or other securities to boost their yield, have been a particularly difficult challenge. With short-term Treasuries yielding below 1%, money fund companies are facing the tough choice of reducing their own fees or lowering the yields on their funds to below 1%. In fact, it is currently hard to find a Treasury-only money market fund which is taking new investors and paying a yield of over 0.5%. Right now taxable money funds are available with yield of between 1% and 1.5%, although the national average has moved below 1%. Yields are continuing to head lower as fund managers reinvest maturing securities at lower and lower rates. It is not inconceivable that by the summer of 2009 nearly all money funds will be yielding below 1%. Find a list of some of the higher yielding money funds at Money-Rates.com.

If your cash investment in money funds is considerable it may be worthwhile to compare the yields at different funds while there is still a variance in yield between different funds. Before investing remember that the federal guarantee on money funds is temporary and that not all companies are participating. Check the fund companies’ website for further details on their participation.