Why are tax-exempt money market yields so high?

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Kenneth Almquist
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Why are tax-exempt money market yields so high?

Post by Kenneth Almquist » Wed Sep 28, 2016 12:12 pm

Currently, Vanguard's tax-exempt money market funds show a higher yield than their taxable funds, which doesn't make sense. Specifically, taxable yields are:
  • 0.56% VMMXX Prime Money Market (expense ratio 0.16%)
  • 0.30% VMFXX Federal Money Market (expense ratio 0.11%)
  • 0.26% VUSXX Treasury Money Market ($50,000 minimum, expense ratio 0.09%)
Tax-exempt yields are higher in all cases except New Jersey:
  • 0.63% VMSXX Tax-Exempt Money Market (expense ratio 0.15%)
  • 0.60% VCTXX California Tax-Exempt Money Market (expense ratio 0.16%)
  • 0.52% VNJXX New Jersey Tax-Exempt Money Market (expense ratio 0.16%)
  • 0.62% VYFXX New York Tax-Exempt Money Market (expense ratio 0.16%)
  • 0.59% VOHXX Ohio Tax-Exempt Money Market (expense ratio 0.16%)
  • 0.60% VPTXX Pennsylvania Tax-Exempt Money Market (expense ratio 0.16%)
Does anybody have any idea what is going on here?

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Re: Why are tax-exempt money market yields so high?

Post by Dale_G » Wed Sep 28, 2016 1:35 pm

Interesting. For August the distribution yield of VMSXX was 0.39% (= $.00033 dividend) and the SEC rate was 0.63%. At least part of the reason higher SEC yield is that the NAV of the fund was $1.0001. The SEC yield accounts for that extra $0.0001 being "returned" as the investment mature sometime over the next couple of months.

Take a look at this Vanguard page to see how the dividend has changed over the past year or so.
https://personal.vanguard.com/us/funds/ ... =INT#tab=4

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Re: Why are tax-exempt money market yields so high?

Post by jalbert » Wed Sep 28, 2016 3:36 pm

Don't know the answer to the OP's question, but keep in mind that once the new Federal rules for MM accounts go into effect, the Prime, Treasury, and Tax-Exempt MMFs will have the potential for govt-mandated liquidity restrictions to be imposed if liquidity becomes a problem for cash markets or there is a run on withdrawals from one of the funds. Such restrictions could be a withdrawal fee or suspending withdrawals altogether. The Federal MMF will be exempt from these rules, at least if it is a sweep fund in a brokerage account, and, although I didn't verify the non-sweep case, probably in all cases.

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Re: Why are tax-exempt money market yields so high?

Post by bberris » Wed Sep 28, 2016 4:13 pm

If the bond holdings are higher than face value of the bonds, the distribution yield will be higher than the SEC (real) yield. This has nothing to do with the NAV not being 1.0000000000. NAV is calculated using the market value of the bonds, not the face value.

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Re: Why are tax-exempt money market yields so high?

Post by FillorKill » Wed Sep 28, 2016 4:36 pm

Kenneth Almquist wrote:Does anybody have any idea what is going on here?
Keep in mind that the SEC yield for a MMF is annualized based on the previous 7 days distributions. Check back next week. :D

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Re: Why are tax-exempt money market yields so high?

Post by patrick » Wed Sep 28, 2016 6:28 pm

It is truly a bizarre world we live in where a money market yield of 0.63% is considered high.

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Electron
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Re: Why are tax-exempt money market yields so high?

Post by Electron » Thu Sep 29, 2016 2:39 pm

There have been many articles recently about outflows from Prime Money Market funds related to the upcoming changes. Try a Google search.

My guess is that the same thing may be happening with Tax Exempt Money Market funds. In any of these cases, it would be harder to sell new paper without yields rising.
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Re: Why are tax-exempt money market yields so high?

Post by Sidney » Thu Sep 29, 2016 2:44 pm

patrick wrote:It is truly a bizarre world we live in where a money market yield of 0.63% is considered high.
if you converted that to a pre-tax yield and subtract inflation you are probably within spitting distance of zero real yield on short term, fairly low risk paper. Doesn't seem strange to me.
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Re: Why are tax-exempt money market yields so high?

Post by FactualFran » Thu Sep 29, 2016 3:23 pm

The interest rate of tax-exempt money market funds have temporarily risen around the end of a number of calendar quarters. I have the impression that at those times the trading volume of very short term tax-exempt securities has been much higher than usual. As a result there have been temporary excursions in the market price. With money market funds that have a constant share price, changes in the market price of the securities in the holdings of the fund affect the yield rather than the price of the fund.
Last edited by FactualFran on Fri Sep 30, 2016 1:13 pm, edited 1 time in total.

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Electron
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Re: Why are tax-exempt money market yields so high?

Post by Electron » Thu Sep 29, 2016 3:54 pm

Take a look at this Bloomberg article. The title is "Muni Money Market Funds Decimated by Rules Intended to Save Them".

http://www.bloomberg.com/news/articles/ ... -save-them
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Re: Why are tax-exempt money market yields so high?

Post by ogd » Thu Sep 29, 2016 4:01 pm

Electron wrote:Take a look at this Bloomberg article. The title is "Muni Money Market Funds Decimated by Rules Intended to Save Them".

http://www.bloomberg.com/news/articles/ ... -save-them
WOW :shock: :confused :?


I think this thread should be retitled "Don't use tax exempt money market funds in the short term, despite the high reported yield".


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Re: Why are tax-exempt money market yields so high?

Post by Kenneth Almquist » Fri Sep 30, 2016 7:59 pm

FillorKill wrote:Keep in mind that the SEC yield for a MMF is annualized based on the previous 7 days distributions. Check back next week. :D
In the three days since I posted, the rates on the tax exempt funds has increased another two basis points, while the rates on the taxable funds has not changed. :?
Electron wrote:Take a look at this Bloomberg article. The title is "Muni Money Market Funds Decimated by Rules Intended to Save Them".

http://www.bloomberg.com/news/articles/ ... -save-them
That article talks about declining assets of tax exempt money market funds, but the new SEC rules also apply to non-government taxable funds like the Vanguard Prime Money Market Fund. I'm guessing is that the difference is that tax exempt money market funds are the main buyers for short term tax exempt obligations, whereas there are a lot more buyers of taxable obligations such as commercial paper. So outflows from the tax exempt money market funds have the power to move interest rates, whereas outflows from other money market funds have relatively little effect.

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Electron
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Re: Why are tax-exempt money market yields so high?

Post by Electron » Sat Oct 01, 2016 2:17 pm

There will undoubtedly be a number of interesting articles on Money Market Fund outflows in the coming weeks. I'll also be looking forward to the commentary in the next Vanguard Annual Reports.

It's quite interesting to look at the Money Market Fund portfolios in the Vanguard Annual Reports.

Vanguard Prime Money Market includes U.S. Government and Agency Obligations, Commercial Paper, Certificates of Deposit, and a few other categories including Taxable Municipal Bonds.

Vanguard Tax-Exempt Money Market holds many different types of securities. See the Key to Abbreviations on page 26 of the Semiannual Report dated August 30. The list includes ARS, BAN, COP, CP, FR, GAN, GO, PILOT, PUT, RAN, TAN, TOB, TRAN, VRDO, and VRDP.

It's interesting that the Variable Rate Demand Obligations in some cases are associated with Leveraged Closed End Municipal Bond Funds such as Blackrock and Nuveen. Those funds sell the VRDOs to provide the leverage used in their portfolios.
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Re: Why are tax-exempt money market yields so high?

Post by FoolStreet » Sat Oct 01, 2016 3:19 pm

I am very curious about this, but don't understand it in lay and terms.


Practically speaking, can I use the ca or national tax exempt money market funds instead of my CapitalOne 360 High Yield Savings account? Mathematically, it looks like a good option, but I don't think I understand the risks associated for a lay person. Or at least, is the risk in-between a HY savings and an intermediate tax exempt bond fund?

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Re: Why are tax-exempt money market yields so high?

Post by Wind_Reaver » Sat Oct 01, 2016 3:44 pm

Jack's "Don't just do something, stand there." quote comes to mind regarding those fund flows.
Might be another example of investors "selling low" (when payouts are rising).
Interested to see if this pressures FDIC account rates.

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Re: Why are tax-exempt money market yields so high?

Post by tjsnow » Sat Oct 01, 2016 4:22 pm

I am just guessing, but I think it has a lot to do with the upcoming regulations for MMF's. Demand for the Federal MMF has been growing exponentially, since it is exempt from the restrictions, while demand for both prime and tax exempt MMF's has correspondingly been falling since both are subject to the restrictions mentioned previously. At the same time that supply is falling, state, municipal and local governments still need short term financing to run their operations, i. e., demand is still about the same. This short term liquidity squeeze is putting upward pressure on short term municipal paper, causing yields to rise as these buyers are forced to pay higher interest rates to finance their ongoing operations. I don't know if I explained this correctly, but I believe that it is all about supply and demand. As supply is falling with demand remaining about the same, prices for these short term instruments are falling and yields are rising.

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Electron
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Re: Why are tax-exempt money market yields so high?

Post by Electron » Sun Oct 02, 2016 2:12 pm

The Money Market Funds at Fidelity have the same relationship we are seeing at Vanguard when comparing the Tax-Exempt and Prime Money Market Funds. The Fidelity Institutional Funds are showing 0.63% for Tax-Exempt and 0.55% for Prime. Those figures are the 7 day SEC yields.

You can see the decline in assets in Vanguard Tax-Exempt Money Market in the Annual Reports and online.

Code: Select all

10-31-15 $17.22B
04-30-16 $16.69B
08-31-16 $15.80B
The September data should be very interesting.

I think the concern in the short term is that significant redemptions could force a fund to sell securities prior to maturity at a loss. Nothing has changed in the credit quality of the investments. Things should change after October 14 when the new rules take effect.

The Libor rate has also been affected as discussed in this Bloomberg article.

http://www.bloomberg.com/news/articles/ ... ing-higher
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Re: Why are tax-exempt money market yields so high?

Post by snorkelwise » Tue Oct 18, 2016 8:24 pm

Are these tax exempt money market funds still essentially safe?? That is, is there much of a chance that I would loose money in these funds, "Break The Buck." Should I be cautious about parking my money in these funds, or just stick to traditional bank savings accounts?

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Re: Why are tax-exempt money market yields so high?

Post by neurosphere » Fri Oct 21, 2016 1:56 pm

snorkelwise wrote:Are these tax exempt money market funds still essentially safe?? That is, is there much of a chance that I would loose money in these funds, "Break The Buck." Should I be cautious about parking my money in these funds, or just stick to traditional bank savings accounts?
In my opinion, the "safe" money market funds from before are still "safe", depending on your definition.

First off, new rules have created restrictions which you may or may not be concerned about. In a crisis where there are massive outflows out of the funds, there may be either a 10-day restriction on when you get your money, or a penalty/charge on that money if you need it prior to 10-days. But if the underlying credit/quality of the issuers which make up the money market investments are do not default, you are not at risk of losing your principal. This aspect of MMF safety has not changed.

If there is a liquidity crisis, and almost everyone in one fund wants their money right away, that money may not be there. This has always been a risk of just about any investment or bank account. That risk hasn't changed. In fact, it has improved because of the penalties which may be imposed in such a situation. So a MMF is now potentially safer from that perspective.

For me, I consider funds such as Vanguards TE MMFs (tax-exept money market funds) to be safe, and have actually moved some of my money from online savings accounts to a TE MMF due to the superior yield in my situation. Note, savings account are FDIC insured. MM funds are NOT. You CAN lose money in an MMF if there are underlying defaults. I happen to feel the risk is very low, and personally consider Vanguard's MM funds and not-quite-but-just-about-almost the same as a savings account. I hope to never have an emergency where I absolutely need that cash before 10 days. On the other hand, the time I would maybe NEED that money within 10 days would likely happen during a restricted time. I.e. I would want to get my money out for the same reason everyone else wants their money out: fear of losing principal due to a credit crisis, or a coming zombie apocalypse (and I needed the money to buy guns, water, and gold). :D
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Re: Why are tax-exempt money market yields so high?

Post by Electron » Fri Oct 21, 2016 2:08 pm

The SEC 7 Day Yield on the Vanguard Tax-Exempt Money Market fund peaked a week ago and appears to be drifting down.

Code: Select all

10/07/2016	$1.00	0.71%
10/10/2016	$1.00	0.72%
10/11/2016	$1.00	0.72%
10/12/2016	$1.00	0.72%
10/13/2016	$1.00	0.72%
10/14/2016	$1.00	0.72%
10/17/2016	$1.00	0.70%
10/18/2016	$1.00	0.70%
10/19/2016	$1.00	0.69%
10/20/2016	$1.00	0.68%
This data is available using the Vanguard Price History Search Tool.
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Re: Why are tax-exempt money market yields so high?

Post by mickeyd » Fri Oct 21, 2016 4:23 pm

Years ago (10?) the tax exempt MMF was paying more than t PMMF. I recall moving most of my PMMF stash over to the TE fund for a while until it reversed course. I do not recall the circumstances that created such a situation.
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Re: Why are tax-exempt money market yields so high?

Post by neurosphere » Sat Apr 01, 2017 10:34 am

Electron wrote:The SEC 7 Day Yield on the Vanguard Tax-Exempt Money Market fund peaked a week ago and appears to be drifting down.
Update, below is the 7 day yield on the Vanguard Municipal MM fund (new name, same fund) since October:

Image

I continue to use MM funds (in my case a NY-specific TE MM fund) as a savings account proxy. Around 25% tax bracket and higher, TE MM funds are competitive with online savings accounts, which currently yield around 1%. It is of course an even better deal for those in higher brackets or subject to AMT (especially those in the high phaseout range). Yes, I'm pretty sure there are some better deals out there. I've stopped chasing saving account yields, and like using a VG MM fund held at Vanguard due to the convenience.

Note, currently about 10% of this fund's assets are subject to AMT, so it is not an AMT "pure" fund.
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Re: Why are tax-exempt money market yields so high?

Post by mickeyd » Sat Apr 01, 2017 12:15 pm

With a yield of 0.71%, it still does not compare favorably with a simple online account (FDIC insured) @ Ally that has an APY of 1%.
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Re: Why are tax-exempt money market yields so high?

Post by neurosphere » Sat Apr 01, 2017 12:25 pm

mickeyd wrote:With a yield of 0.71%, it still does not compare favorably with a simple online account (FDIC insured) @ Ally that has an APY of 1%.
My (federal) marginal tax rate approaches 40%. Which makes the after tax yields roughly equal. So from that perspective, they are similar. Agreed, there is risk with the MM, and near-zero risk with an FDIC insured account. From that standpoint, they do not compare favorably.

In my personal case (NYC resident) I use the NYC MM, which has the same 0.7% yield, which is even higher than 1% on a tax equivalent basis (but with additional state-specific risk).

I'm not trying to discourage online savings accounts, but merely to point out that for "lowish" savings account-type balances (however one defines low), I like the convenience of using a MM at Vanguard for depositing dividends, keeping some extra cash, making Roth contributions, etc. Rather than have an intermediary savings account to eek out a little yield (or a little less risk).

This is in contrast to a couple of years ago, when money market accounts were essentially paying zero percent.

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Re: Why are tax-exempt money market yields so high?

Post by Electron » Wed Apr 05, 2017 2:44 pm

neurosphere wrote:Update, below is the 7 day yield on the Vanguard Municipal MM fund (new name, same fund) since October.
The last two Fed Rate Hikes were on 12-14-16 and 3-15-17, and your chart shows how quickly the yield on the Vanguard Municipal Money Market fund reacted to those increases.
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Re: Why are tax-exempt money market yields so high?

Post by zzz » Mon Jan 08, 2018 3:27 am

Since the last post, the Vanguard NY Tax Exempt has shot up to 1.34%. With NY Taxes no longer being deductible the top rate that a NY tax payer has to deal with with Fed=37%, NY=8.82% abd NIIT=3.8% totaling 49.62%. This makes the 1.34% and effective yield of 1.34*(1/(1-0.4962)) = 2.66%, This is now crazy high. What is causing this? Is this a short term?
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neurosphere
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Re: Why are tax-exempt money market yields so high?

Post by neurosphere » Mon Jan 08, 2018 8:49 am

zzz wrote:
Mon Jan 08, 2018 3:27 am
Since the last post, the Vanguard NY Tax Exempt has shot up to 1.34%. With NY Taxes no longer being deductible the top rate that a NY tax payer has to deal with with Fed=37%, NY=8.82% abd NIIT=3.8% totaling 49.62%. This makes the 1.34% and effective yield of 1.34*(1/(1-0.4962)) = 2.66%, This is now crazy high. What is causing this? Is this a short term?
This also makes the spread between tax-exempt money markets and intermediate/long-term tax-exempt bond funds very narrow. Or perhaps it has always (recently) been narrow. Not sure. If I had more time, I'd look up and compare the yield curve of treasuries vs the yield curve of tax-exempt MM/bonds now vs, say 1 and 2 years ago. But no time for that today. :D
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