Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

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*3!4!/5!
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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by *3!4!/5! » Fri Jun 16, 2017 8:36 pm

NEWS FLASH! VMMXX has smashed through the 1.00% barrier and is now at 1.01%

See it happen here (look at yield column).
06/14/2017-06/16/2017
https://personal.vanguard.com/us/funds/ ... &year=#res
with SEC yields rising 1bp per day!

I couldn't find an SEC yield historical chart but her are tables from V's "Price history search" page (https://personal.vanguard.com/us/funds/ ... torysearch).
06/16/2016-06/16/2017
https://personal.vanguard.com/us/funds/ ... &year=#res
06/16/2015-06/16/2016
https://personal.vanguard.com/us/funds/ ... &year=#res
06/16/2014-06/16/2015
https://personal.vanguard.com/us/funds/ ... &year=#res

In just over 2 years, from 05/29/2015 to 06/16/2017, VMMXX has gone from 0.01% to 1.01%, an increase of 10000% or 1%, depending how you look at it. :)

Look out online savings accounts, VMMXX is hot on your tail! ;)

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by sapphire96 » Fri Jun 16, 2017 8:59 pm

White Coat Investor wrote:I've spent a lot of time thinking about this and was way too slow to move to savings accounts 8 years ago so I was Johnny on the spot moving back this Spring. The bank can pay you whatever it wants. As long as it can loan money for more than it is paying its depositors, it could work out well for the bank. So it is only vaguely related to market rates.

MMFs are basically the market. So you get the market rate. For a short term security like those in a MMF, those rates are highly correlated to the rates the Fed sets to try to regulate the economy (unemployment rate and inflation rate primarily). So when the Fed raises rates as they have lately, a MMF is very responsive to those. But the same thing happens when the Fed lowers rates. The Fed only indirectly gets to set medium and long term rates, but they have exquisite control over short term rates.
With the Federal Funds rate likely to increase steadily over the next few years by another percent or two, MMF will begin to look attractive, IMO.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by grabiner » Fri Jun 16, 2017 10:09 pm

Boglehawk wrote:
House Blend wrote:
Boglehawk wrote:I do itemize my taxes and am subject to AMT. Based on this, it looks like Prime MM will work best for me given the current yields. Because these numbers are so close, it probably doesn't make much of a difference one way or the other. Nonetheless, thanks again for explaining how these calculations work.
By the way, given that you do pay AMT, it is highly likely that your Federal marginal tax rate is *not* 33%. Best to play with some tax software to see, for example, what it does to your Federal tax bill if you add, say $100, of bank interest to last year's tax return.
House Blend:

I did what you recommended (added $100 of interest income to my 2016 tax return) and my refund dropped by $35. I assume that means that my marginal tax bracket (when considering AMT) is 35%. Is that correct?
Your marginal tax rate is 35%, and this is the important number. This is not necessarily the same as your tax bracket, although it probably is in your case (depending on how you define tax brackets; the AMT rate is 28% but the personal exemptions phase out to add 7% to the marginal tax rate).
David Grabiner

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Oicuryy » Fri Jun 16, 2017 10:33 pm

*3!4!/5! wrote:but I'm also interested in the theoretical quation of what drives yields on Money Market versus online savings.
These days the Fed offers to borrow overnight from money market funds at an interest rate equal to the low end of their target range for the federal funds rate. Anyone else who wants to borrow from money market funds has to offer to pay a higher interest rate. See https://www.federalreserve.gov/monetary ... ements.htm

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by *3!4!/5! » Fri Jun 16, 2017 10:58 pm

Oicuryy wrote:
*3!4!/5! wrote:but I'm also interested in the theoretical question of what drives yields on Money Market versus online savings.
These days the Fed offers to borrow overnight from money market funds at an interest rate equal to the low end of their target range for the federal funds rate. Anyone else who wants to borrow from money market funds has to offer to pay a higher interest rate. See https://www.federalreserve.gov/monetary ... ements.htm
Interesting. I see here
https://personal.vanguard.com/us/funds/ ... =INT#tab=2
that they have "Repurchase Agreements" 7.9%, so that seems to indicate that the Fed rates provide some kind of floor for the money market rate. And it really looks like these rates are going up.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by TD2626 » Sat Jun 17, 2017 9:30 am

The 1.00% number is really just a nice number psychologically. It's like when the dow hit 20,000. Does 19,999 vs 20,000 really mean anything to your portfolio? Not really.

That being said, 1% is a nice round number, and is great for those who have been earning basically nothing for years.

It's nice that people are able to include income from money markets as an actual income source in short-term projections. When it was 0.01%, income from the fund was basically zero and in many cases could be dwarfed by getting money out of couch cushions.

This is very nice that money markets are offering this income.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by garlandwhizzer » Sat Jun 17, 2017 11:50 am

Two things about MM funds. First, they are instantly liquid at all times. CDs are not and have penalties for withdrawal before maturity. Second, the principal value, unlike short term bond funds, does not decline in an environment like ours at present when the FED is raising now and plans to continue raising in the future short term interest rates. ST bond funds yield a tiny bit more but that increased yield is diminished in terms of total return by their expected decrease in principal value in a rising rate environment. High quality MM funds, like Vanguard's Prime Fund, are to my way of thinking the best place to park cash that needs to be both liquid at all times with no loss of principal value and safe from market perturbations. The government and Vanguard declared during the depths of the collapse in 2008-9 that the $1 share price would be supported and that was the worse financial disaster since 1929 - 32. That is good enough insurance for me.

In the retirement/withdrawal phase, I have always kept considerable assets in MM funds to cover expected living expenses for at least 2 years, sometimes 3+ years, depending on market conditions. It assures me that I won't have to sell anything in the way of equity or bonds for a considerable period of time, plenty of time for me to figure out how to get out of the current mess. Research shows that investor satisfaction and freedom from worry does not correlate well with the size of his/her portfolio but rather most closely with the size of the cash position. MM is a form of cash as are insured liquid bank accounts. These hold up well in real terms during prolonged and increasing inflation because, unlike longer term bonds, they do not lose principal value. Vanguard lists Prime MM Fund at risk level 1, the lowest, and that is where they belong IMO.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by *3!4!/5! » Sat Jun 17, 2017 1:21 pm

TD2626 wrote:The 1.00% number is really just a nice number psychologically. It's like when the dow hit 20,000. Does 19,999 vs 20,000 really mean anything to your portfolio? Not really.

That being said, 1% is a nice round number, and is great for those who have been earning basically nothing for years.

It's nice that people are able to include income from money markets as an actual income source in short-term projections. When it was 0.01%, income from the fund was basically zero and in many cases could be dwarfed by getting money out of couch cushions.

This is very nice that money markets are offering this income.
OP here, I freely confess that I started this thread precisely for this reason, that VMMXX SEC yield reached the arbitrary level of 1.00%. But the real news is that after several years of having yield way below other cash-like options (e.g. online savings accounts), it is rapidly catching up, and may soon actually surpass them.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sat Jun 17, 2017 3:13 pm

garlandwhizzer wrote:Two things about MM funds. First, they are instantly liquid at all times.
So are savings accounts.
CDs are not and have penalties for withdrawal before maturity.
Perhaps you missed the discussion about the Ally no-penalty CD earning 1.35%. But why are you comparing to CDs instead of to savings accounts? The alternative to a MM fund is a savings account, not a CD with an early withdrawal penalty.
Second, the principal value, unlike short term bond funds, does not decline in an environment like ours at present when the FED is raising now and plans to continue raising in the future short term interest rates.
Again, why compare to short-term bonds instead of a savings account?
High quality MM funds, like Vanguard's Prime Fund, are to my way of thinking the best place to park cash that needs to be both liquid at all times with no loss of principal value and safe from market perturbations.
Why would you prefer a MM fund earning 1% (or much less until recently) to a bank account earning 1.15% or more? I can see it for an IRA, but not for a Vanguard account that can be easily linked to an external bank account for buying and selling purposes.
In the retirement/withdrawal phase, I have always kept considerable assets in MM funds to cover expected living expenses for at least 2 years, sometimes 3+ years, depending on market conditions.
Really? You've been keeping cash in a MM fund earning close to 0% while you could have been earning 1% in an FDIC-insured bank account? I just don't get that. I stopped using my Vanguard MM funds in my taxable accounts when Vanguard instituted same-day purchases from linked bank accounts (at which time MM accounts were paying a much lower rate than good bank accounts).
MM is a form of cash as are insured liquid bank accounts.
Finally! So why haven't you been using an "insured liquid bank account" earning 1% in preference to a MM account earning 0.01%?

The benefit of MM funds used to be that they had higher interest rates than bank savings accounts, but that stopped being true years ago. SEC yield on VMMXX was less than 0.1% most of the time from 12/2009 - 11/2015. One of the points of this thread is that we may be approaching a time when MM funds are once again competitive with good savings accounts.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by garlandwhizzer » Sat Jun 17, 2017 4:19 pm

Kevin M wrote:
Finally! So why haven't you been using an "insured liquid bank account" earning 1% in preference to a MM account earning 0.01%?
Currently Prime MM fund is yielding 1.01%. My local bank doesn't offer savings accounts that yield that much but even if they did I'd leave my money where it is. When the FED raises rates again which they are expected to this year that increased rate will be reflected immediately in the MM fund with a higher yield. I don't know whether the same will happen in a savings account. I have no problem with bank savings accounts but for simplicity I like keeping cash money where my investment portfolio is. I periodically sell equity in my non-tax deferred account which replenish my cash position when needed in the same account. Also sometimes, on those very rare occasions when a compelling equity buying opportunity presents itself, I can very quickly move money from MM funds to purchase risk assets in my non-tax deferred account. I believe bank savings accounts are fine and have the advantages of MM funds if you prefer to do it that way. I don't find the example of a savings account yielding 0.14% more than Prime MM Fund currently (and who knows what that difference will be after a few more rate hikes) sufficiently compelling to switch. I like doing it the way I do it. It's worked pretty well for me for the last 30 years.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by IlliniGuy » Sat Jun 17, 2017 5:08 pm

*3!4!/5! wrote: But the real news is that after several years of having yield way below other cash-like options (e.g. online savings accounts), it is rapidly catching up, and may soon actually surpass them.
I fully agree that this is big news. Prior to 2009 I was very happy to consistently earn very competitive interest from Prime MM instead of chasing rates at whatever online bank was offering a special for a few months. I'm not a big fan of CDs because I don't like opening accounts all over the place and keeping track of maturities and EWPs. (My concern there is keeping things reasonably simple for my wife in case I suddenly couldn't manage the family finances.) So Prime MM regaining its mojo is great news! I haven't moved my savings back yet, but I expect that I will once the rate is 10-20 bps more than my Alliant CU savings account.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sat Jun 17, 2017 5:18 pm

garlandwhizzer wrote:
Kevin M wrote:
Finally! So why haven't you been using an "insured liquid bank account" earning 1% in preference to a MM account earning 0.01%?
Currently Prime MM fund is yielding 1.01%.
I was asking about continuing to use the MM fund from 2009-2015 when the MM rate was close to 0%, while savings accounts offered ballpark 1% this entire time.

I will switch back to using an MM fund when the MM rate exceeds a good savings account rate. I require at least a small yield premium since MM accounts are not FDIC insured.
I have no problem with bank savings accounts but for simplicity I like keeping cash money where my investment portfolio is. I periodically sell equity in my non-tax deferred account which replenish my cash position when needed in the same account. Also sometimes, on those very rare occasions when a compelling equity buying opportunity presents itself, I can very quickly move money from MM funds to purchase risk assets in my non-tax deferred account.

As mentioned, you can do same-day purchases of Vanguard mutual fund shares with a linked external savings or checking account, and you can have distributions and sales proceeds go directly into your linked external bank account. This has been working great for me since Vanguard instituted same-day mutual fund purchases.

The only time I have to manually move money between Vanguard and my bank is for distributions from ETFs that go into the settlement fund.
I believe bank savings accounts are fine and have the advantages of MM funds if you prefer to do it that way. I don't find the example of a savings account yielding 0.14% more than Prime MM Fund currently (and who knows what that difference will be after a few more rate hikes) sufficiently compelling to switch. I like doing it the way I do it. It's worked pretty well for me for the last 30 years.
There are several banks offering rates from 1.25-1.30%. Savings Account Rates | DepositAccounts.com. Even Synchrony Bank savings earns 1.15%.

But I agree that it's not worth messing around with another account for an additional 10-20 basis points. I would for 90 basis points though, which was the savings account yield premium over Prime MM for more than five years.

On the other hand, Ally Bank is offering a no-penalty CD at 1.35% for $25K minimum, and it was worth the five minutes it took me to open two of them last week (since I already have Ally accounts, and use Ally as my hub bank).

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by sport » Sat Jun 17, 2017 5:25 pm

Kevin M wrote:Why would you prefer a MM fund earning 1% (or much less until recently) to a bank account earning 1.15% or more? I can see it for an IRA, but not for a Vanguard account that can be easily linked to an external bank account for buying and selling purposes.
Kevin,
As we get older, and contemplate the eventuality that someone else may need to manage our finances, we have decided that simplicity in our financial matters is more important than trying to squeeze every last dollar of performance out of the investments. So, we have kept money in bank savings accounts earning 0.40% when 1.0% was available elsewhere. Now that Vanguard's MM funds are more competitive, most of that money has been moved from the bank.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by crg11 » Sat Jun 17, 2017 5:42 pm

Interesting thread. I do like the thought of consolidating my online savings accounts into VMMXX now that it's yield is 1%, but one thing keeps nagging me: Vanguard Prime Money Market Fund (VMMXX) doesn't offer FDIC insurance, right?

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by sport » Sat Jun 17, 2017 6:09 pm

crg11 wrote:Interesting thread. I do like the thought of consolidating my online savings accounts into VMMXX now that it's yield is 1%, but one thing keeps nagging me: Vanguard Prime Money Market Fund (VMMXX) doesn't offer FDIC insurance, right?
Right! Mutual funds are not bank accounts. However, Vanguard invests this fund very conservatively. If you are really concerned about that, the Federal MM fund invests in obligations of federal agencies, and thus is a little safer. However, the yield is a little less.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by sport » Sat Jun 17, 2017 6:28 pm

There is another aspect to the comparison of bank accounts and MM funds. When you put money in a bank account, you are lending it to the bank or CU. If not for FDIC or NCUA insurance, your money would be only as safe as the bank or CU is solvent. That would be a significant risk. OTOH, when you put money in your Vanguard MM fund account, you are not lending the money to Vanguard. You are assigning the money to Vanguard so that Vanguard can invest the money for you. If somehow Vanguard failed, the investments would still be held by the trustee. So, the risk in a Vanguard MM fund is a risk that the investments go belly up and cannot repay these short term loans. This is a much lower level of risk, since it is diversified, and especially since Vanguard does not make risky investments with this money.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by crg11 » Sat Jun 17, 2017 6:59 pm

sport wrote:There is another aspect to the comparison of bank accounts and MM funds. When you put money in a bank account, you are lending it to the bank or CU. If not for FDIC or NCUA insurance, your money would be only as safe as the bank or CU is solvent. That would be a significant risk. OTOH, when you put money in your Vanguard MM fund account, you are not lending the money to Vanguard. You are assigning the money to Vanguard so that Vanguard can invest the money for you. If somehow Vanguard failed, the investments would still be held by the trustee. So, the risk in a Vanguard MM fund is a risk that the investments go belly up and cannot repay these short term loans. This is a much lower level of risk, since it is diversified, and especially since Vanguard does not make risky investments with this money.
Excellent explanation, thank you.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by jmk » Sat Jun 17, 2017 7:10 pm

Kenkat wrote:I moved all my reserve cash from CapitalOne 360 Savings to Prime MM a couple of weeks ago.
CapitalOne just started what they call a "money market"but is really a high-minimum savings account with $10k minimum. It generates 1.04%. It functions just like its savings account, including FDIC.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sat Jun 17, 2017 7:31 pm

sport wrote:
Kevin M wrote:Why would you prefer a MM fund earning 1% (or much less until recently) to a bank account earning 1.15% or more? I can see it for an IRA, but not for a Vanguard account that can be easily linked to an external bank account for buying and selling purposes.
Kevin,
As we get older, and contemplate the eventuality that someone else may need to manage our finances, we have decided that simplicity in our financial matters is more important than trying to squeeze every last dollar of performance out of the investments. So, we have kept money in bank savings accounts earning 0.40% when 1.0% was available elsewhere. Now that Vanguard's MM funds are more competitive, most of that money has been moved from the bank.
Fair answer. Similarly, I've left my savings at Ally Bank at 1.05% instead of transferring it to Synchrony Bank, where I also have accounts, at 1.15%, or opening yet another bank account to earn 1.30%. Ally Bank is a more full-service provider than Synchrony Bank, which is why I use it as my main/hub bank.

The thing is, you're probably going to want a bank account anyway, and once you have the link with Vanguard set up, your external bank account functions almost like a money market fund at Vanguard--it's very seamless. But if your bank savings only earns 0.4%, and you're otherwise happy with that bank, then of course the MM fund at 1% probably is a better choice.

I wouldn't completely discount the FDIC insurance of a bank account though.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by protagonist » Sat Jun 17, 2017 8:13 pm

If VMMXX is not federally insured it seems like a poor choice for a large cash account.

There are many online banks that offer better than 1%, FDIC insurance, and the ability to rapidly transfer funds into Vanguard if desired.

I keep my Fidelity Money Market account and treat it as my primary checking account, but I keep the bulk of my cash in an online bank at 1.06%. I move money into Fidelity as needed.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by protagonist » Sat Jun 17, 2017 8:13 pm

If VMMXX is not federally insured it seems like a poor choice for a large cash account. For small amounts of cash, a difference of 1% interest is pretty trivial.

There are many online banks that offer better than 1%, FDIC insurance, and the ability to rapidly transfer funds into Vanguard if desired.

I keep my Fidelity Money Market account and treat it as my primary checking account, but I keep the bulk of my cash in an online bank at 1.06%. I move money into Fidelity as needed.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by MIpreRetirey » Sat Jun 17, 2017 8:30 pm

Almost 2 yrs. ago, listening to tips from this board, I saw my main goto for short term( VFSTX VG short term IG) looking like a loss for the rest of the year. I bought 1 yr(1.25), 2 yr(1.45) and 3yr(3.0) CDs for my laddered income as starting withdrawals.
Good move. I also found my local CU that pays 3% checking ata max of $25k. That is my 'this yr. account.
Although VMMXX is OK for one yr. Hoping VFSTX gets to a higher yield also, because CDs, besides VMMXX, aren't what they were 2 yrs. ago.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by RAchip » Sat Jun 17, 2017 8:43 pm

"If VMMXX is not federally insured it seems like a poor choice for a large cash account. For small amounts of cash, a difference of 1% interest is pretty trivial."

What is a "large cash account"? I hold way way more cash than $250k. FDIC insurance is pretty meaningless to me. For "a lot" of cash vmmxx is now becoming very attractive.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sat Jun 17, 2017 9:05 pm

RAchip wrote:"If VMMXX is not federally insured it seems like a poor choice for a large cash account. For small amounts of cash, a difference of 1% interest is pretty trivial."

What is a "large cash account"? I hold way way more cash than $250k. FDIC insurance is pretty meaningless to me. For "a lot" of cash vmmxx is now becoming very attractive.
It's easy to get up to $1.25M by using POD or a trust with five beneficiaries, or $500K with just a joint two-owner account. There are many other combinations of accounts and ownership categories you can use to get way more than $250K of coverage in a taxable account. In an IRA, however, you're stuck with $250K coverage, but of course that's just for the "certain retirement accounts" ownership category, so you could have $250K in an IRA and $1.25M in taxable POD/trust accounts, all fully insured.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by garlandwhizzer » Sat Jun 17, 2017 10:02 pm

Kevin M wrote:
On the other hand, Ally Bank is offering a no-penalty CD at 1.35% for $25K minimum, and it was worth the five minutes it took me to open two of them last week (since I already have Ally accounts, and use Ally as my hub bank).
I just went to the Ally Bank web site and checked on their 12 month CD which does in fact pay 1.35%. However in their own words:
Early withdrawal penalty will apply
Kevin stated "no-penalty" whereas the bank website states "penalty will apply" for the 12 month CD. I'm assuming the website is correct. CD rates can be higher than money market rates because higher interest is required due to the illiquidity premium that CD has but MM doesn't have. MM funds are instantly available anytime without penalty. Having instant access to my MM without penalty is more important to me than 34 basis points over 12 months. It's all a matter of personal preference and, personally, I don't like to lock up considerable money in an illiquid space. I am willing to suffer the consequence of a loss of 34 basis points in today's market. But over the next 12 months the loss may be much less or even disappear. If, as expected over the next 12 months, short term rates rise by 0.25% to 0.5% or more, my MM yield will quickly reflect that rise in yields and go up in yield, whereas the 12 month CD will have you locked in at today's old rate for a year. It is entirely possible, even likely, that by the time of maturity on this 12 month CD, the Prime MM fund will be yielding more than 1.35%. IMO it may be misleading to compare CD yields to MM yields when short term rates are in a state of flux.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by lack_ey » Sat Jun 17, 2017 11:59 pm

garlandwhizzer wrote:I just went to the Ally Bank web site and checked on their 12 month CD which does in fact pay 1.35%. However in their own words:
Early withdrawal penalty will apply
You're looking at the regular CD. Check the No Penalty CD with the 11-month term. With $25k min, 1.35%.
https://www.ally.com/bank/no-penalty-cd/

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by TD2626 » Sun Jun 18, 2017 12:19 am

crg11 wrote:
sport wrote:There is another aspect to the comparison of bank accounts and MM funds. When you put money in a bank account, you are lending it to the bank or CU. If not for FDIC or NCUA insurance, your money would be only as safe as the bank or CU is solvent. That would be a significant risk. OTOH, when you put money in your Vanguard MM fund account, you are not lending the money to Vanguard. You are assigning the money to Vanguard so that Vanguard can invest the money for you. If somehow Vanguard failed, the investments would still be held by the trustee. So, the risk in a Vanguard MM fund is a risk that the investments go belly up and cannot repay these short term loans. This is a much lower level of risk, since it is diversified, and especially since Vanguard does not make risky investments with this money.
Excellent explanation, thank you.
Very nice point about money markets being diversified. You are effectively investing at many, many banks and other types of issuers through money market investments. That provides a very good amount of safety, especially for those who need cash holdings over FDIC limits.

However, in general, I think that FDIC accounts are safer than money markets for those within the limits. Nobody has lost any FDIC insured funds in the history of the FDIC. Money markets have failed, and investors have lost money (read about the Reserve Primary fund's failure in 2008). For things in which liquidity and protection of nominal principal are important, it's hard to beat having accounts at several different FDIC insured banks.

Of course, money market risks are fairly small - and there is an expectation that they will protect nominal principal. In my opinion, if a large money market fund "broke $1.00" as in "breaking the buck", that would be somewhere between "major scandal" and "major scandal that brings down the company". It could even end up at "major scandal that brings down the company and most of Wall Street" level bad.

The risks are so remote that debates of FDIC's insurance vs money market's diversification are probably not worth having. One will likely own both money markets (as the core fund in a brokerage) and FDIC's (as regular checking accounts) anyway in the course of a normal life. Why not split the difference and park some money both places?

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by sport » Sun Jun 18, 2017 1:47 am

I figure that compared with the stock and bond mutual funds in my portfolio, my MM fund is very safe. If something should occur that would cause a loss in the MM fund, those same events would cause much worse problems in the other investments. IOW, if things got really bad, the loss in my MM fund would be among the least of my concerns.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by *3!4!/5! » Sun Jun 18, 2017 1:49 am

Kevin M wrote:The benefit of MM funds used to be that they had higher interest rates than bank savings accounts, but that stopped being true years ago.
Ah, this was something I was wondering about. What is known about the history of this comparison (MMFs versus savings accounts, and now especially online savings accounts)? As interest rates "normalize" is it reasonable to expect that MMFs will surpass online savings accounts?

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sun Jun 18, 2017 10:47 am

garlandwhizzer wrote: Kevin stated "no-penalty" whereas the bank website states "penalty will apply" for the 12 month CD. I'm assuming the website is correct.
As lack_ey pointed out, you're looking at the wrong CD. The no-penalty CD is an 11-month CD, and here's what the Ally website says about it:
With our No Penalty CD, you will not be charged a penalty for early withdrawal. You can withdraw your full balance and interest any time after the first 6 days following the date you funded the account.
garlandwhizzer wrote:CD rates can be higher than money market rates because higher interest is required due to the illiquidity premium that CD has but MM doesn't have.
Normally this is true, but not with no-penalty CDs.
garlandwhizzer wrote:MM funds are instantly available anytime without penalty. Having instant access to my MM without penalty is more important to me than 34 basis points over 12 months.

With the no-penalty CD you can have both! Well, not really. First, it's 11 months, and we don't know what the yield premium will be over the entire period--I would expect the Prime MM yield to be higher than that within 11 months. But with the no-penalty CD you can just do a penalty-free early withdrawal and reinvest at a higher rate when it becomes available.

I agree that it's not much money, and I wouldn't have messed around with it if I didn't already have an account at Ally Bank, and if it wasn't so easy and quick to open the CD.

I also usually don't mess around with CDs of less than 5-year maturity, since with a low early withdrawal penalty (EWP), you often get comparable or even better 1-4 year returns after paying the EWP than on 1-4 year CDs, and if rates don't increase much, you end up better off with the longer-term rate. For example, one of the last CDs I bought was a 7-year at 3% with an EWP of six months of interest, which would yield 1.5% if I did an early withdrawal after one year. That's the same as the best rate I see for a 1-year CD at DepositAccounts.

That's much less illiquidity than a 7-year brokered CD, and yet probably a higher rate than a 7-year brokered CD at the time (although I didn't check). There's more going on with direct CDs than just an illiquidity premium.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sun Jun 18, 2017 11:43 am

*3!4!/5! wrote:
Kevin M wrote:The benefit of MM funds used to be that they had higher interest rates than bank savings accounts, but that stopped being true years ago.
Ah, this was something I was wondering about. What is known about the history of this comparison (MMFs versus savings accounts, and now especially online savings accounts)? As interest rates "normalize" is it reasonable to expect that MMFs will surpass online savings accounts?
You can get historical yields since inception for a Vanguard MM fund, but I don't know of a good source for historical competitive savings account rates. I know MM funds used to offer higher rates than bank accounts--otherwise I wouldn't have used them in preference to bank accounts. Here's one interesting historical note, from Wikipedia:
Money market funds in the United States created a solution to the limitations of Regulation Q, which at the time prohibited demand deposit accounts from paying interest and capped the rate of interest on other types of bank accounts at 5.25%. Thus, money market funds were created as a substitute for bank accounts.
Money market fund yields tend to track short-term Treasury yields, while competitive savings accounts offered a healthy yield premium of about 100 basis points for more than five years while short-term Treasury yields hugged 0%. We certainly haven't seen an increase in savings account rates of 100 bps, as we have seen with short-term Treasuries and MMFs, but they have been creeping up. As an indication of this, Ken Tumin at DepositAccounts used to have a "1% club" for savings accounts with a rate of 1% or greater, but recently has replaced that with a 1.25% club, since that's now the hurdle that the top-tier savings accounts must meet or exceed.

If the trend were to continue, we'd see MMF rates exceed top-tier savings account rates in the not-to-distant future, especially if the Fed follows through with a couple more rate hikes fairly soon. However, banks may want to continue to be competitive with MM funds, so maybe we'll continue to see the top-tier rates increase as well.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sun Jun 18, 2017 1:11 pm

Kevin M wrote: You can get historical yields since inception for a Vanguard MM fund <snip>
Not quite true. VMMXX inception was in 1975, but SEC yields are only available since 1993.
Kevin M wrote:Money market fund yields tend to track short-term Treasury yields <snip>
Here's Prime MMF (VMMXX) yield compared to the 3-month Treasury yield 7-day trailing average since 1993. I did a 7-day trailing average of the Treasury yield since it smooths it out a bit, and makes it more comparable to the 7-day SEC yield for the MMF.

Image

VMMXX yield is from the Vanguard site, and the 3-month Treasury yield is from FRED.

We can see limited savings rate histories for various banks at DepositAccounts. For example, there's rate history for Ally Bank savings since 1/5/2010, at which time it was 1.50%. It dropped below 1% on 10/12/2011 (0.94%), and then vacillated between a low of 0.84% and a high of 0.95% until 12/19/2014 when it hit 0.99%, and then remained at about 1% until the recent increase to 1.05% in April 2017. I don't know of a way to download these rates from DA--I'm just reading them from a rate history chart DA displays when viewing the bank details.

We also know that the 3-month Treasury closely tracks the federal funds rate (FFR), so we should expect Prime MMF yield to pretty much follow the path of the FFR.

Image

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Theoretical » Sun Jun 18, 2017 1:21 pm

I think one difference is that this fund makes more sense than the savings account if you're using cash as an asset class, rather than an e-fund or saving for a big purchase.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Sun Jun 18, 2017 1:37 pm

Theoretical wrote:I think one difference is that this fund makes more sense than the savings account if you're using cash as an asset class, rather than an e-fund or saving for a big purchase.
Why? I track cash as an asset class, and include all bank and credit union savings and checking accounts, as well as money market funds (which I have continued to use to a limited extent in IRAs, but I try to keep these balances relatively low). Usually there's not enough in checking accounts to bother with, except for my reward checking account which I keep as close to the balance cap of $15K as possible. For a small portfolio, a reward checking account could be a good choice for the entire fixed-income allocation.

I have never had a separate designation for an emergency fund, and although I think about liquidity for big purchases, I don't have a separate asset class designation for cash targeted for them. I just know my cash allocation is going to get bigger for awhile, then drop when the purchase occurs. I don't really have a policy target allocation for cash though.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by *3!4!/5! » Sun Jun 18, 2017 1:49 pm

Thanks for the charts! I'd been searching, and couldn't find a chart for SEC yield (or any kind of yield) for any MMF.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by abuss368 » Sun Jun 18, 2017 2:23 pm

Wow! Maybe I need to review and compare to our savings account.

Problem is I would probably have to open a Vanguard Brokerage Account correct? Do they allow Mutual Fund Accounts any longer?
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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by CWRadio » Sun Jun 18, 2017 2:26 pm

Anyone know if Fidelity offers a 1% MM fund? Paul

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by sport » Sun Jun 18, 2017 3:04 pm

abuss368 wrote:Wow! Maybe I need to review and compare to our savings account.

Problem is I would probably have to open a Vanguard Brokerage Account correct? Do they allow Mutual Fund Accounts any longer?
All new VG accounts are brokerage. However, it is just as easy to open a brokerage account and put a MM fund in it as it would have been to open a mutual fund account.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by lack_ey » Sun Jun 18, 2017 3:55 pm

CWRadio wrote:Anyone know if Fidelity offers a 1% MM fund? Paul
As a retail investor, if you have $1M to invest. The general-purpose prime money market fund offered (Fidelity Money Market Fund) has a yield of 0.84% on the regular shares and 0.92% on the premium share class with the $100k minimum. And that's including the currently active fee waivers.

This is definitely a category where Vanguard's general rather than selective dedication to low fees pays off.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Kevin M » Mon Jun 19, 2017 11:42 am

*3!4!/5! wrote:Thanks for the charts! I'd been searching, and couldn't find a chart for SEC yield (or any kind of yield) for any MMF.
For non-MM funds, the Price & Performance page has a list of recent prices at the top right and a "Search for more historical price information" link below those prices. Clicking on the link takes you to a "Price history search" page where you can retrieve historical prices (one year at a time).

For MM funds, they don't include the historical prices, but show this note:
Price history does not apply to money market funds because they historically have maintained a stable price of $1.00 per share. However, our Price History Search tool also includes historical yield information, which may be useful when evaluating money market funds.
I hadn't actually noticed the link to the price history search tool before, so was getting to it for another fund, then selecting the money market fund once in the tool.

When clicking the link to the price history tool from non-MM funds, the fund you were looking at is selected by default, but for MMFs, no fund is selected by default, so you have to select it from the fund drop-down box.

I have a Google Sheets script that retrieves prices and yields, so I don't have to manually copy/paste one year at a time from the price search page.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by unmesh » Wed Jun 21, 2017 2:11 pm

lack_ey wrote:
garlandwhizzer wrote:I just went to the Ally Bank web site and checked on their 12 month CD which does in fact pay 1.35%. However in their own words:
Early withdrawal penalty will apply
You're looking at the regular CD. Check the No Penalty CD with the 11-month term. With $25k min, 1.35%.
https://www.ally.com/bank/no-penalty-cd/
Now 1.5%. And Ally will automatically give you a higher rate if they offer one within 10 days of funding.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by *3!4!/5! » Mon Jun 26, 2017 11:36 pm

VMMXX now beats Ally online savings.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by random_walker » Tue Jun 27, 2017 12:38 am

I see that VMMXX today yields 1.07% but the expense ratio for 2016 was 0.16%.
If you deduct the annual expenses, isn't the yield still less than 1% whereas many online banks offer more than 1%?

https://personal.vanguard.com/us/funds/ ... IntExt=INT

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by stlutz » Tue Jun 27, 2017 12:40 am

The listed yield is after expenses.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by triceratop » Tue Jun 27, 2017 1:41 am

*3!4!/5! wrote:VMMXX now beats Ally online savings.
But not Synchrony yet.
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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Munir » Tue Jun 27, 2017 9:00 am

GS Bank (Goldman Sachs) Online Savings is at 1.20% and Barclay's at 1.15%.
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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by Da5id » Tue Jun 27, 2017 9:13 am

Capital One 360 MM is now 1.10% (https://www.capitalone.com/online-money-market-account/). I have cash there, and will switch to Vanguard MM whenever Vanguard passes Cap One. Not really willing to open new accounts for an extra tenth of a percent as the dollar amount involved isn't worth the hassle to me.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by *3!4!/5! » Tue Jun 27, 2017 12:47 pm

triceratop wrote:
*3!4!/5! wrote:VMMXX now beats Ally online savings.
But not Synchrony yet.
Yet. (Thanks for future segway.) It seems Synchrony aren't as complete an online bank as Ally, which has checking, and a lot of people use it as their banking hub. I admit I'm just posting another arbitrary milestone, but MMFs have certainly re-emerged from obscurity. It's also true that some (almost)cash(like) options are up to 1.5%, so MMFs have a way to go before catching those, and maybe they won't.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by House Blend » Wed Jun 28, 2017 10:52 am

BTW, there's another reason why having MMFs cross the 1% barrier should have Bogleheads worldwide dancing in the streets.

That's the threshold where the CAGR, rounded to two decimal places, is greater than the yield. For example, if the SEC yield of your MMF is exactly 0.90%, the CAGR is about 0.904%, which rounds to 0.90%. At 1%, the CAGR rounds to 1.01% [*].

Math geeks will recognize that this has to do with the fact that the quadratic term in the Taylor series for exp(x) is x^2/2. This evaluates to half a basis point when x = .01 (i.e., 1%).

[*] The fine print: SEC yield is annualized by multiplying by 365/7, and so does not account for compounding effects. Also, the real threshold for this rounded 1 basis point jump is closer to 1.01%, not 1%, since the exponential function is only an approximation to the effect of 365/7 compounding periods. And the quadratic term is an approximation to the approximation.

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Re: Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

Post by linenfort » Wed Jun 28, 2017 12:32 pm

I never would have noticed the 1% breach if it hadn't been for this forum.
I thought everyone had forgotten Prime with the forced(?) "upgrade" at Vanguard to VMFXX, the federal MM fund for our sweep accounts.
The last post I remember seeing about it was something about Taylor holding on to Prime because of the way statements are reported or something.

I've previously bounced around from Prime to the state of PA's tax-exempt MMF to Federal to 6-month treasury bills. Will have to take another look.

I see investor shares are still 3,000 and the minimum for Admiral shares is five million. Ok, then!
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