Vanguard Federal Money Market compared to Prime Money Market

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drzzzzz
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Vanguard Federal Money Market compared to Prime Money Market

Post by drzzzzz » Fri Oct 12, 2018 8:00 am

Vanguard is highlighting information on their web-site about the rate of their federal money market fund (VMFXX which is also their settlement account and has a current SEC yield of 2.04%) as being higher than many other outside money market accounts. I am interested in clarifying a few things, is Vanguard's federal money market account taxable by state and local municipalities and does anyone know how Vanguard reports this to you on a 1099- either as dividends or interest or some other classification to note that it isn't taxable except by the federal government? Also, when comparing this to their Vanguard prime money market fund (VMMXX, current SEC yield of 2.16%) which provides a higher after tax yield when factoring in a Pennsylvania tax rate of 3.07%? thanks

DDS
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by DDS » Fri Oct 12, 2018 8:45 am

I'd actually like to know where people think is best for rainy day in this vein as well. Since I always put money into VG on the first of the month I figured just keeping it in one of the two accounts you're suggesting makes sense, but is it better to go with a fund with a better yield? There's a few out there in the 2.3% range if you put $25k down.

Geologist
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by Geologist » Fri Oct 12, 2018 8:47 am

Vanguard provides a sheet that lists the percentage of income for each fund, including money market funds, derived from federal debt not subject to state and local taxation each year when the 1099 is issued. This information can't be included on the 1099 because the IRS doesn't permit it, by the way, so it is provided separately. It is up to you to a) enter this information in your tax software, b) provide it to your accountant, c) or otherwise use it to get your state and local tax liability calculated correctly.

Generally, the Federal MM does have a higher proportion of state and locally tax-exempt income, but I don't have the figures for 2017 at hand. You can probably find the sheet on the Vanguard website.

3funder
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by 3funder » Fri Oct 12, 2018 9:02 am

Both are pretty safe. My wife and I have selected Prime.

retiringwhen
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by retiringwhen » Fri Oct 12, 2018 9:07 am

Here is the link on the Vanguard site for the QDI and State Tax Calculations.

This page is the landing page for lots of Tax related info for all Vanguard Funds
https://personal.vanguard.com/us/insigh ... guardfunds

This is the Federal Obligations page:
https://personal.vanguard.com/pdf/USGO_022018.pdf

Favorite these for each tax year. The applicability is State-specific so i can't provide much input, except to say that in NJ, VFMXX does not qualify for reduced state income taxes, but other funds do like VUSXX (Treasury Money Market.)

retiringwhen
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by retiringwhen » Fri Oct 12, 2018 9:16 am

BTW, as a NJ resident, I currently use the US Treasury Money Market for half of my emergency fund because for the last year it has met or exceeded all other Money Market returns net taxes. The other half sits in VMMXX (Prime) today, but in the past I have put that in the VNJXX (NJ Tax-Exempt MM). Since late last year, that fund has lagged VMMXX and VUSXX at my tax-bracket (22 to 24% Fed and .6.37% NJ).

Putting your money in VFMXX (Federal) is going to give you a good return (better than almost any non-Vanguard MM) with minimum hassle (just sits in the settlement account.) But if you are going to have money sitting for a long-time, do the math and figure out which is best relatively speaking.

As a hobby (it probably makes me about $20 a year :sharebeer ), I do a weekly tracking graph of VMMXX, VFMXX, VNJXX and VUSXX to see the interest rate trends. I do move money among the 4 funds as rates adjust. The trends tend to hold pretty steady over the long-term though, so only when you see a major shift like last year's tax bill induced rate adjustments do I make any significant changes.

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Cyclesafe
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by Cyclesafe » Fri Oct 12, 2018 9:49 am

drzzzzz wrote:
Fri Oct 12, 2018 8:00 am
Vanguard is highlighting information on their web-site about the rate of their federal money market fund (VMFXX which is also their settlement account and has a current SEC yield of 2.04%) as being higher than many other outside money market accounts. I am interested in clarifying a few things, is Vanguard's federal money market account taxable by state and local municipalities [https://personal.vanguard.com/pdf/USGO_022018.pdf (see ** next to Federal Money Market] and does anyone know how Vanguard reports this to you on a 1099- either as dividends or interest or some other classification to note that it isn't taxable except by the federal government? [My recollection is that one needed in 2017 to classify it manually] Also, when comparing this to their Vanguard prime money market fund (VMMXX, current SEC yield of 2.16%) which provides a higher after tax yield when factoring in a Pennsylvania tax rate of 3.07%? thanks [After Tax Yield (ATY) calculation requires your marginal federal tax rate (MFTR):

ATY = 2.16*(1-MFTR-.0307) versus 2.04*(1-MFTR) Assuming PA doesn't tax interest from VMFXX - check with PA. CA, CT, and NY don't tax.)]

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JoMoney
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by JoMoney » Fri Oct 12, 2018 12:30 pm

Vanguard doesn't report the amount of state tax-exempt bonds on the 1099s for any of it's funds. They provide the information elsewhere, and you have to manually adjust on your taxes.
I like the higher rates being offered now, I was shifting back and forth between my high-yield FDIC MM Account and Vanguards MM Fund for awhile, but haven't moved anything for a couple months now.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

mikedm
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by mikedm » Sat Oct 13, 2018 9:47 am

I'm reading all of the responses and I guess I still don't understand the difference between the Federal and Prime MM Funds. If both funds are equal in regards to safety then why not choose Prime since the yield and performance is better than Federal? Based on some of the responses is it that the Federal MM fund has a tax advantage over the Prime fund? Does it matter that I'm in a no-income tax state? I'm thinking of moving the short term savings I have at Ally to one of these funds because they both offer a better yield (realizing I'd give up the FDIC insurance), but I need to decide which to put it in.

onourway
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by onourway » Sat Oct 13, 2018 9:55 am

mikedm wrote:
Sat Oct 13, 2018 9:47 am
I'm reading all of the responses and I guess I still don't understand the difference between the Federal and Prime MM Funds. If both funds are equal in regards to safety then why not choose Prime since the yield and performance is better than Federal? Based on some of the responses is it that the Federal MM fund has a tax advantage over the Prime fund? Does it matter that I'm in a no-income tax state? I'm thinking of moving the short term savings I have at Ally to one of these funds because they both offer a better yield (realizing I'd give up the FDIC insurance), but I need to decide which to put it in.
Both funds should be considered very safe, but not equally safe. There are some specific rules in place that make the Federal fund a bit safer, hence it being the default sweep fund in your brokerage account. Some states may offer a small tax benefit due to the specific holdings in the Federal fund that could make the after-tax return of that fund as good as or better than the Prime fund.

Personally I use the Prime fund.

arf30
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by arf30 » Sat Oct 13, 2018 10:00 am

VMMXX is subject to restrictions like floating NAV, redemption gates/fees, that could cause you to lose money or not be able to withdraw during a crisis. VMFXX is classified as a federal money market fund and does not have these restrictions. This is the reason brokerages use federal money market funds as settlement accounts and not prime.

https://investor.vanguard.com/mutual-fu ... et-reform/

retiringwhen
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by retiringwhen » Sat Oct 13, 2018 10:01 am

mikedm wrote:
Sat Oct 13, 2018 9:47 am
I'm reading all of the responses and I guess I still don't understand the difference between the Federal and Prime MM Funds. If both funds are equal in regards to safety then why not choose Prime since the yield and performance is better than Federal? Based on some of the responses is it that the Federal MM fund has a tax advantage over the Prime fund? Does it matter that I'm in a no-income tax state? I'm thinking of moving the short term savings I have at Ally to one of these funds because they both offer a better yield (realizing I'd give up the FDIC insurance), but I need to decide which to put it in.
They are not equivalent, read the Prospectus of the two funds. Prime invests in Corporate Debt, Bank CDs and other vehicles that are not part of Federal, thus the risk profile is slightly different which in turn provides marginally higher return.

Functionally, from an investor perspective they work the same with the MM rules for trying to keep a $1 NAV.

But, Vanguard has convinced the SEC that the the Federal MM has about as much a chance of breaking a $1 NAV as putting the money in bank CDs and deposits, so they allow it as a settlement account. Vanguard specifically created this new MM a couple of years ago to meet those SEC regulations for settlement accounts. It is one of the small ways that Vanguard sets itself apart from all other Brokerages. In fact, it is the underlying policy and approach that lets them make the marketing pitch all Vanguard customers got this week about their "cash".

Prime and the old US Treasury MM do not meet this rules (much of those rules are actually related to how money is redeemed from the funds, not the actual investments.) So the theory is that under great duress, those MM Funds could temporarily "break a buck", as they say. I lose zero sleep over that theory.

sport
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by sport » Sat Oct 13, 2018 10:07 am

retiringwhen wrote:
Sat Oct 13, 2018 10:01 am
Vanguard specifically created this new MM a couple of years ago to meet those SEC regulations for settlement accounts.
Vanguard has had the Federal MM fund in place for many years. I have been using it along side my Prime MM fund for money that I wish to keep separate. The thing that is new is the use of this fund as a settlement fund for brokerage accounts.

beardsworth
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by beardsworth » Sat Oct 13, 2018 10:24 am

mikedm wrote:
Sat Oct 13, 2018 9:47 am
I'm reading all of the responses and I guess I still don't understand the difference between the Federal and Prime MM Funds.
Some other posters here have already mentioned, briefly, a distinction between "government" and non-government money market funds.

Here's a more detailed explanation from Vanguard's own prospectus, explaining how this distinction applies to Prime Money Market:

"In July 2014, the Securities and Exchange Commission (SEC) implemented a number of regulatory changes designed to enhance the stability and resilience of all money market funds. The reforms have created three categories of money market funds:

• Retail money market funds, which may maintain a stable net asset value (NAV) but are subject to liquidity fees and redemption gates.

• Government money market funds, which may maintain a stable NAV but are not required to implement liquidity fees and redemption gates.

• Institutional money market funds, which are required to have a floating NAV and are subject to liquidity fees and redemption gates. . . .

Vanguard has designated Vanguard Prime Money Market Fund as a retail money market fund. . . . Retail money market funds are permitted to continue to maintain a stable NAV through the use of amortized cost accounting. If a retail money market fund’s weekly assets fall below a certain threshold, retail money market funds are subject to fees and gates.

There are two types of liquidity fees: discretionary liquidity fees and default liquidity fees.

Discretionary liquidity fee. The Fund may impose a liquidity fee of up to 2% on all redemptions in the event that the Fund’s weekly liquid assets fall below 30% of its total assets if the Board determines that it is in the best interest of the Fund. Once the Fund has restored its weekly liquidity assets to 30% of total assets, any liquidity fee must be suspended.

Default liquidity fee. The Fund is required to impose a liquidity fee of 1% on all redemptions in the event that the Fund’s weekly liquid assets fall below 10% of its total assets unless the Fund’s Board determines that (1) the fee is not in the best interest of the Fund or (2) a lesser/higher fee (up to 2%) is in the best interest of the Fund.

In addition to, or in lieu of, the liquidity fee, the Fund is permitted to implement temporarily a redemption gate (i.e., suspend redemptions) if the Fund’s weekly liquid assets fall below 30% of its total assets. The gate could remain in effect for no longer than 10 days in any 90-day period. Once the Fund has restored its weekly liquidity assets to 30% of total assets, the gate must be lifted.

If you redeem shares when the Fund has imposed a liquidity fee, then the amount you receive for your redemption will be reduced by the amount of the liquidity fee and will generally cause you to recognize a loss for tax purposes equal to the amount of that fee. Once the Fund imposes a redemption gate, then unprocessed orders to redeem will be canceled and the Fund will not accept redemption orders until the gate is no longer in effect. If you still wish to redeem once the gate is lifted, you will need to submit a new redemption request to the Fund or your financial intermediary."


IMO, a few basis points of extra yield in Prime Money Market is not worth the extra complexity, the hassle of potentially imposed liquidity restrictions (however unlikely), and loss of principal (also however unlikely). IMO, it's better to stick with Vanguard Federal or Vanguard Treasury, neither of which is subject to such rules, and both of which also have higher overall credit quality than Prime.

I assume these are among the same reasons why Vanguard itself changed the default sweep fund in its brokerage accounts from Prime Money Market to Federal Money Market.

retiringwhen
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by retiringwhen » Sat Oct 13, 2018 10:37 am

sport wrote:
Sat Oct 13, 2018 10:07 am
retiringwhen wrote:
Sat Oct 13, 2018 10:01 am
Vanguard specifically created this new MM a couple of years ago to meet those SEC regulations for settlement accounts.
Vanguard has had the Federal MM fund in place for many years. I have been using it along side my Prime MM fund for money that I wish to keep separate. The thing that is new is the use of this fund as a settlement fund for brokerage accounts.
You are right, in 2016, it got updated along with Prime and VUSXX (US Treasury MM) to meet the new rulesets, the fund was not actually created, my bad.

If you want to read about all this in more detail, read the Prospestus for all three funds at https://personal.vanguard.com/pub/Pdf/p ... 2210140152

In particular there are about two pages on how the liquidity gates and fees rules are implemented based on the new SEC regulations. Interestingly, as I read it to respond here, I was reminded that both Federal and US Treasury Money Markets do NOT implement the gates and fees defined in the SEC regulation, but Prime does.

That is what makes Federal Money Market unique. It is considered "safe" enough by the regulators to be used as a Settlement Account, but it is not implementing the gates and fees model. I am reminded now, that at the time of the SEC rules, Vanguard's argument was that the costs of running those gates was too much for such a low risk fund and they prevailed upon the SEC. The ER for Prime is 0.16% and for Federal 0.11%, US Treasury (with a $50K minimum) is 0.9%"

retiringwhen
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by retiringwhen » Sat Oct 13, 2018 10:53 am

Okay, so this thread made me look at Fidelity to see what their Federal Money Market equivalent looks like.

I turns out they were able to make the same case about their Fidelity Government Money Market (SPAXX) https://fundresearch.fidelity.com/mutua ... /31617H102. It does not implement the gates/fees rules either, but their fees are still 3.5 times greater than Vanguard.

The Expense Ratio is .42% and their current yield is 1.71% vs. Vanguard Federal Money Market (VMFXX) of 2.03% the ER different is significant and the yields show it. (additionally, their summary has the following quote
Fidelity is voluntarily reimbursing a portion of the fund's expenses. If Fidelity had not, the returns would have been lower.
So, Vanguards advantage is not a different implementation of the rules. Just that they do it for at least 75% LESS than Fidelity..... Want to know where Fidelity gets its revenue to subsidize their Zero Funds? Look no further.

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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by MnD » Sat Oct 13, 2018 11:14 am

If I was at Vanguard I'd put 75% in a 3-date 13-week t-bill ladder (2.40% current TEY at 5% state tax), 25% in Prime or Federal and do a lot better than what's being discussed here. The tax benefit on Federal MM puts the TEY up high enough IMO that the Prime non-sweep purchase and sale requirements to access funds for trades or spending would not be worth the bother. Would sleep like a baby with either choice - the "risks" being discussed here are a bit over the top.

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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by welderwannabe » Sat Oct 13, 2018 2:48 pm

retiringwhen wrote:
Sat Oct 13, 2018 10:37 am
That is what makes Federal Money Market unique. It is considered "safe" enough by the regulators to be used as a Settlement Account, but it is not implementing the gates and fees model. I am reminded now, that at the time of the SEC rules, Vanguard's argument was that the costs of running those gates was too much for such a low risk fund and they prevailed upon the SEC. The ER for Prime is 0.16% and for Federal 0.11%, US Treasury (with a $50K minimum) is 0.9%"
There was a significant amount of horse trading going on during regulations development for money market reform. Many more organizations than Vanguard were involved and Vanguard really isn't doing anything special in this area. These compromises were reached so as not to destroy the money market business as a whole, not because fees and gates cost money to run.

One of the SEC's initial pitches was to just make all money markets use a floating NAV, which would really be a problem since selling the fund could result in reportable capital gains events. This would make it a nightmare for the average Joe. The compromise that was reached was to restrict access to fixed NAV funds to ownership by natural persons (not corporations and businesses). A further compromise was reached that allowed non-natural persons to invest in fixed NAV funds as long as they invested solely in government securities and their derivatives such as asset repurchase agreements backed by treasuries. Any person, company etc can invest in a floating NAV fund, but in reality most of those funds have been created with minimums that far exceed what an average person could handle...they are really designed for pension funds, companies etc.

As to liquidity gates and fees they are optional components for government retail money markets. A government fund can choose to include them or not. This privilege is not solely extended to solely to Vanguard by any stretch. However, they are not optional for retail money market funds that do not invest solely in government securities and/or their dervivates. This includes funds such as Fidelity's SPRXX, or Vanguards Prime or municipal MM.


I have not been able to find any reference anywhere that a brokerage would be prohibited from using a non-government money market as a settlement fund for natural persons. The regulation may be present...I just haven't seen it. My belief is that it is just easier to use the same settlement fund for all account types (trusts, partnerships, corporations, individuals) then trying to worry about different fund types for different accounts. Its obviously also easier to use a settlement fund where you have to worry about fees or gates being imposed during a liquidity crunch, so as long as a brokerage selects a government MM that doesn't impose such restrictions (remember, any government MM can if it chooses!), then that is one less complication.

Vanguard has the best lowest fee MM's in the business and the vast majority of my MM money is with Vanguard. However, other brokerages have done even more creative things with MMs such as Fidelity where any money market in your account can be used to settle a trade. They pull from the 'core account' (their name for a settlement fund) first for a settlement, and then if it doesnt contain enough it will pull from any and all available MM's in your account...regardless of type. Now if they could only drop their MM fees at Fidelity...
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

retiringwhen
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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by retiringwhen » Sat Oct 13, 2018 3:24 pm

welderwannabe wrote:
Sat Oct 13, 2018 2:48 pm
retiringwhen wrote:
Sat Oct 13, 2018 10:37 am
That is what makes Federal Money Market unique. It is considered "safe" enough by the regulators to be used as a Settlement Account, but it is not implementing the gates and fees model. I am reminded now, that at the time of the SEC rules, Vanguard's argument was that the costs of running those gates was too much for such a low risk fund and they prevailed upon the SEC. The ER for Prime is 0.16% and for Federal 0.11%, US Treasury (with a $50K minimum) is 0.9%"
There was a significant amount of horse trading going on during regulations development for money market reform. Many more organizations than Vanguard were involved and Vanguard really isn't doing anything special in this area. These compromises were reached so as not to destroy the money market business as a whole, not because fees and gates cost money to run.

One of the SEC's initial pitches was to just make all money markets use a floating NAV, which would really be a problem since selling the fund could result in reportable capital gains events. This would make it a nightmare for the average Joe. The compromise that was reached was to restrict access to fixed NAV funds to ownership by natural persons (not corporations and businesses). A further compromise was reached that allowed non-natural persons to invest in fixed NAV funds as long as they invested solely in government securities and their derivatives such as asset repurchase agreements backed by treasuries. Any person, company etc can invest in a floating NAV fund, but in reality most of those funds have been created with minimums that far exceed what an average person could handle...they are really designed for pension funds, companies etc.

As to liquidity gates and fees they are optional components for government retail money markets. A government fund can choose to include them or not. This privilege is not solely extended to solely to Vanguard by any stretch. However, they are not optional for retail money market funds that do not invest solely in government securities and/or their dervivates. This includes funds such as Fidelity's SPRXX, or Vanguards Prime or municipal MM.


I have not been able to find any reference anywhere that a brokerage would be prohibited from using a non-government money market as a settlement fund for natural persons. The regulation may be present...I just haven't seen it. My belief is that it is just easier to use the same settlement fund for all account types (trusts, partnerships, corporations, individuals) then trying to worry about different fund types for different accounts. Its obviously also easier to use a settlement fund where you have to worry about fees or gates being imposed during a liquidity crunch, so as long as a brokerage selects a government MM that doesn't impose such restrictions (remember, any government MM can if it chooses!), then that is one less complication.

Vanguard has the best lowest fee MM's in the business and the vast majority of my MM money is with Vanguard. However, other brokerages have done even more creative things with MMs such as Fidelity where any money market in your account can be used to settle a trade. They pull from the 'core account' (their name for a settlement fund) first for a settlement, and then if it doesn't contain enough it will pull from any and all available MM's in your account...regardless of type. Now if they could only drop their MM fees at Fidelity...
Thanks for the clarification, I realized part of that later ( Vanguard was unique and noted in a later post.)

What is interesting is that Fidelity allows the settlement activities to be pulled from other money markets. That is interesting. It kind of works like an overdraft protection on the settlement account?

This also reminds me that I had it backwards, regarding the SEC plan, the Gov't seems to not care about the settlement account having the gates, they just worry about orderly redemption processes and treat Federal Funds as less likely to have issues vs. Corporate(Prime), thus enforcing the rules. It is the brokerages that limit access to Prime funds, probably to reduce major execution issues if folks made trades that cannot settle due to gates on the funds.

So in theory, you could have a Settlement Money Market that broke but buck if there was some sort of liquidity crunch on the Federal funds money markets. Very unlikely, as someone noted earlier this is getting pretty esoteric and should not make any difference in choosing the funds. More like how/why did we end up where we are, not having Prime Funds available as settlement accounts.

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Re: Vanguard Federal Money Market compared to Prime Money Market

Post by pleeson » Sat Oct 13, 2018 4:09 pm

Federal MM has 86% in US Bonds and T-Bills,14% in Repurchase agreements and an average maturity of 56 days.
Prime MM has 57% in Yankee Bonds, and an average maturity of 45 days.
So, there are some differences...

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