Comparing a Short-Term Bond Yield to a MMF APY?

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dang1
Posts: 42
Joined: Wed Nov 28, 2012 2:37 pm

Comparing a Short-Term Bond Yield to a MMF APY?

Post by dang1 »

Hello all,

For some of my cash, I currently have it at a local credit union earning a .60% APY. This is fully taxable,
so at the federal level I'm losing about 37% of this rate, resulting in roughly a .38% APY net.
This money would be "safe" from price fluctuations.

I am looking at putting some of this in VWSUX - Vanguard Short-Term Tax-Exempt Fund, which is currently showing
a 30-day SEC yield of .42% and a distribution yield of 1.06%. Obviously, this investment could fluctuate, but as it's
short term, hopefully not by too much.

My question is - how do I compare the APY of the Credit Union Money Market to the ST bond fund? Is it as simple as
say .38% (credit union net) vs .42% (or 1.06%) at Vanguard? I am trying to gauge how much of a premium I will get
for price fluctuation risk?

Thanks very much for the advice!
crefwatch
Posts: 737
Joined: Sun Apr 15, 2007 1:07 pm
Location: New Jersey, USA

Re: Comparing a Short-Term Bond Yield to a MMF APY?

Post by crefwatch »

Don't forget that bonds also fluctuate in price (often for shorter periods of time) due to market issues. That is, fear that companies or states won't honor all their debts, or that the market will be disrupted in unpredictable ways. In the last year, muni bonds have had short-term disruptions due to loss of tax revenues. Corporates were affected by fear that the market would freeze up, until the Fed started buying vast quantities of bonds.

I don't mean to panic you, but you only mentioned "interest rate risk." I own lots of bond funds. Bonds are not very "like" bank accounts.
Topic Author
dang1
Posts: 42
Joined: Wed Nov 28, 2012 2:37 pm

Re: Comparing a Short-Term Bond Yield to a MMF APY?

Post by dang1 »

Thanks very much for the reply!

Anyone can clarify how APY compares to Bond Yield? I would like to compare the MM yield to the ST Muni yield.

Thank you.
MikeG62
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Location: New Jersey

Re: Comparing a Short-Term Bond Yield to a MMF APY?

Post by MikeG62 »

dang1 wrote: Thu Oct 08, 2020 9:31 pm Thanks very much for the reply!

Anyone can clarify how APY compares to Bond Yield? I would like to compare the MM yield to the ST Muni yield.

Thank you.
The 30-day SEC yield would be comparable to the CU APY.
Real Knowledge Comes Only From Experience
crefwatch
Posts: 737
Joined: Sun Apr 15, 2007 1:07 pm
Location: New Jersey, USA

Re: Comparing a Short-Term Bond Yield to a MMF APY?

Post by crefwatch »

I think this definition from Vanguard is important. I have added bolding to one phrase, which subject is often discussed on this board:

[SEC Yield]

A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield.

The SEC yield for a money market fund is calculated by annualizing its daily income distributions for the previous 7 days.

It's important to remember that bank MM accounts are not regulated exactly like mutual-fund family money market accounts. I don't say that to sow doubt or fear, because I own plenty of Vanguard MM funds, and also own VWSUX. My point is that when Vanguard talks about "money market funds", they mean SEC-regulated mutual funds, not bank products. SEC Yield reporting is firmly regulated, but it is less "certain" than a bank APY report. However, when you are talking about an instrument where the bank has unlimited rights to change the interest rate, that APY isn't "certain", either.

Here is a quote from the Wiki article, https://en.wikipedia.org/wiki/Money_market_fund

Banks in the United States offer savings and money market deposit accounts, but these should not be confused with money mutual funds. These bank accounts offer higher yields than traditional passbook savings accounts, but often with higher minimum balance requirements and limited transactions. A money market account may refer to a money market mutual fund, a bank money market deposit account (MMDA) or a brokerage sweep free credit balance.
Topic Author
dang1
Posts: 42
Joined: Wed Nov 28, 2012 2:37 pm

Re: Comparing a Short-Term Bond Yield to a MMF APY?

Post by dang1 »

That is great info. Thank you very much for your replies!
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