Bank Money Market Rates Outpacing Yields on Money Funds

Mutual fund money markets have had a tumultous six months. A perfect storm arose to test the whole industry. First, the safety of money funds was called into question after several funds “broke the buck” during the mortgage-backed securities crisis. Then yields on money funds were pushed down close to 1% after the Fed lowered rates and Treasury yields fell in a global flight-to-quality. Finally, many funds were forced to close off their funds to new investors in order to pay out any rate of return (after expenses) on their money funds. A painful time period for mutual fund money market managers to say the least.

Investors have been reassured by a temporary federal guaranteed program for funds held prior to September 19, 2008 in money funds. The quasi-insurance program is only for participating companies, although at last count over 90% of all mutual fund companies were in the program. Still even with the issue of the safety of money funds set aside, the yields on the funds compare very poorly as highlighted below comparing the Fidelity money fund yields versus the highest yielding bank money market accounts posted at Money-Rates.com:

Money Fund Yields (7-day Effective)

Fidelity Cash Reserves 1.05%

Fidelity Government Money Market Fund 0.69%

Fidelity Money Market Fund 1.09%

Fidelity U.S. Treasury 0.02%

Bank Money Market Account Rates

Venture Bank Direct 3.50%

ADB Bank 3.15%

Principal Bank 3.04%

First East Side Savings Bank 3.01%

A savings investor can prettily easily triple their rate of return by switching to a higher yielding bank money market account. In addition, where yields on money funds are expected to continue to drift lower as more of their matured holdings are reinvested at lower rates - yields on bank money market accounts are expected to hit a floor in the 2% to 2.5% range. So while there are significant difference between the two types of investment that we have not discussed here,  there is no question that as far as rates go - bank money market accounts are outperforming money funds.

Source: Fidelity.com, Money-Rates.com