Treasury MM yield down to 0.01%

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gordoni2
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Treasury MM yield down to 0.01%

Post by gordoni2 » Mon Dec 21, 2009 2:37 pm

According to the Vanguard website the SEC yield on the Vanguard Admiral Treasury Money Market fund (VUSXX) has dropped to 0.01%. Should this be of concern? What happens next?

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Re: Treasury MM yield down to 0.01%

Post by ddb » Mon Dec 21, 2009 2:46 pm

gordoni2 wrote:According to the Vanguard website the SEC yield on the Vanguard Admiral Treasury Money Market fund (VUSXX) has dropped to 0.01%. Should this be of concern? What happens next?
Wouldn't concern me very much. I would be curious, though, what provisions Vanguard has in place to subsidize a money market fund in the event that the underlying interest is not sufficient to cover operating expenses. I would assume that they would never intentionally let the fund drop below $1.00 per share, so I'm curious where the money would come from the cover the expenses. Do they have the ability to raid other funds, or do they have some sort of "emergency fund" set aside for times like this?

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Re: Treasury MM yield down to 0.01%

Post by oneleaf » Mon Dec 21, 2009 2:52 pm

ddb wrote: Wouldn't concern me very much. I would be curious, though, what provisions Vanguard has in place to subsidize a money market fund in the event that the underlying interest is not sufficient to cover operating expenses. I would assume that they would never intentionally let the fund drop below $1.00 per share, so I'm curious where the money would come from the cover the expenses. Do they have the ability to raid other funds, or do they have some sort of "emergency fund" set aside for times like this?

- DDB
Good question. On a related note, what happened to the non-admiral version of this fund? I see it no longer exists, presumably because yield did not cover ER. Researching what happened to that one will probably give some insight into what would happen if the Admiral-Treasury or Federal fund drops further.

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Post by ruud » Mon Dec 21, 2009 2:55 pm

oneleaf wrote:On a related note, what happened to the non-admiral version of this fund?
from a vanguard press release:
Vanguard has completed the merger of the $6.2 billion Vanguard Treasury Money Market Fund (VMPXX) into the lower-cost $20.2 billion Vanguard Admiral™ Treasury Money Market Fund (VUSXX), effective at the open of business on August 11, 2009.

The merger of Vanguard Treasury Money Market Fund, which had an expense ratio of 0.28%, into the Admiral Treasury Money Market Fund, with its lower expense ratio of 0.15%, reduces expenses for Treasury Fund shareholders, while helping the yields of the funds remain competitive.
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Treasury MM

Post by EyeDee » Mon Dec 21, 2009 4:58 pm

.
Since I do not believe Vanguard can raid other funds to cover a fund's expenses and they have already stretched things by holding some Agency funds instead of all treasury (I think the prospectus allows them some leeway), I think they will try to squeeze as much as they can out of the fees and if that is not enough, I think they will either merge it with another money market fund or add a fee that is deducted regularly rather than break the buck. Of course they could change it to a variable NAV fund, but then it would not be a traditional money market fund and they would need to change its name or it would be considered breaking the buck.
Randy

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Post by jeffyscott » Mon Dec 21, 2009 5:17 pm

Maybe they'd merge it with the Federal MM? Except that one is yielding only 0.02%. So maybe they all go to prime with it's whopping 0.07%?

Why anyone who has the option to use a bank account would remain in any money market fund is beyond me.
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Post by dm200 » Mon Dec 21, 2009 5:45 pm

This will be "interesting".

Can a fund run with a negative return? Is a "negative return" different than "breaking the buck"?

The previous horror stories of funds breaking the buck were, I believe, actual loss of value of the holdings, not that the retuens on the holdings were so low that expenses could not be absorbed.

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Post by Doc » Mon Dec 21, 2009 7:29 pm

dm200 wrote:This will be "interesting".

Can a fund run with a negative return? Is a "negative return" different than "breaking the buck"?

The previous horror stories of funds breaking the buck were, I believe, actual loss of value of the holdings, not that the retuens on the holdings were so low that expenses could not be absorbed.
Money market funds have special rules. They get to value their assets at "par". They can get away with not "marking to market" because by law (regs) they have very short term assets. If they can't cover expenses with income they have to sell assets but they are only going to get "market" which is less than the value on their books. So they break the buck. This makes some investors cash out which in turn causes more selling and bingo - default. :(
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Post by eurowizard » Mon Dec 21, 2009 11:16 pm

I sure hope that VG doesnt subsidize the return from other funds. I dont hold T-MMF and I dont want my TSM money going to pay other people's debt.

If I had to guess, the fund would NOT break the buck, would remain at $1 NAV and have a negative yield. At the end of the month, that cost is taken from the account - the exact opposite of what happens when there is a positive return.

Is there really a difference between 0.01% and -0.01%? It's the same difference between 10% and 10.02%. If you are looking for high return, then T-MMF isn't for you. If you are looking for risk-free liquidity, then it's worth the opportunity cost.

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...

Post by jh » Tue Dec 22, 2009 10:10 am

...
Last edited by jh on Thu Dec 31, 2009 3:16 pm, edited 1 time in total.

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Post by KyleAAA » Tue Dec 22, 2009 10:20 am

I wouldn't worry about it, but I wouldn't own it, either. Online savings accounts are still yielding in the 1.3-1.5% range.

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Post by eurowizard » Tue Dec 22, 2009 10:25 am

Alliants NCUA insured savings account is 2%.

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Re: Treasury MM yield down to 0.01%

Post by Tramper Al » Tue Dec 22, 2009 10:39 am

ddb wrote:I would be curious, though, what provisions Vanguard has in place to subsidize a money market fund in the event that the underlying interest is not sufficient to cover operating expenses. I would assume that they would never intentionally let the fund drop below $1.00 per share, so I'm curious where the money would come from the cover the expenses. Do they have the ability to raid other funds, or do they have some sort of "emergency fund" set aside for times like this?
I would suggest that when a MMF yield gets to such a low and arbitrary rate like 0.01%, that the floor designed to keep the yield positive is already bearing some of the weight. I noted recently that a large number of Fidelity's various MMFs have a yield of 0.01%, yet none have yields that are negative, 0.00%, or 0.02%. Coincidence?

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Post by Munir » Tue Dec 22, 2009 10:47 am

The ten year treasury rate is at 3.73% today. Is this a new high for the year? Does this rising rate (if it keeps rising) have an impact on money market rates eventually?

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Post by simplesimon » Tue Dec 22, 2009 11:12 am

Munir wrote:The ten year treasury rate is at 3.73% today. Is this a new high for the year? Does this rising rate (if it keeps rising) have an impact on money market rates eventually?
Nope.

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Post by spam » Tue Dec 22, 2009 11:40 am

Penfed has been offering 5 year CD's to exsisting customers at 4%. Everyone else can get a 7 year at 4%.

Thats a nice spread to Treasurys.

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Post by dm200 » Tue Dec 22, 2009 11:45 am

Doc wrote:
dm200 wrote:This will be "interesting".

Can a fund run with a negative return? Is a "negative return" different than "breaking the buck"?

The previous horror stories of funds breaking the buck were, I believe, actual loss of value of the holdings, not that the retuens on the holdings were so low that expenses could not be absorbed.
Money market funds have special rules. They get to value their assets at "par". They can get away with not "marking to market" because by law (regs) they have very short term assets. If they can't cover expenses with income they have to sell assets but they are only going to get "market" which is less than the value on their books. So they break the buck. This makes some investors cash out which in turn causes more selling and bingo - default. :(
I do know that MM Funds have some special rules, but I had been puzzled that some folks seemed to be sayig that a MM Fund could operate with a negative return, without breaking the buck. It seems that this is not so - a negative return breaks the buck. Correct?

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Re: Treasury MM yield down to 0.01%

Post by jeffyscott » Tue Dec 22, 2009 12:53 pm

Tramper Al wrote: I noted recently that a large number of Fidelity's various MMFs have a yield of 0.01%, yet none have yields that are negative, 0.00%, or 0.02%. Coincidence?
I think not, but I also assume Fido had/has more room to cut it's management fee to maintain a positive yield. The owners of Fidelity (the management company) may also be able to subsidize their money fund, if they so choose...essentially they would be using past profits to temporarily subsidize the fund(s). Or maybe it would be future profits, that is what is often done when a new fund has a subsidy, the fund pays it back later when it has more assets.

I don't know that Vanguard has the option to force the owners of the management company (which is all of us, right?) to subsidize this fund. With Admiral ER at 0.15%, I doubt there any room to cut the management fee.
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No quotes on short TIPS

Post by Doc » Tue Dec 22, 2009 1:04 pm

I've been letting my MM balances get depleted and have been relying on short TIPS for emergencies.In doing some end of year planning I needed cash and found NO BIDS for short TIPS at Fidelity, Schwab or Vanguard. I haven't called any bond desks yet as I'm still doing planning but this is very troublesome. Any thoughts?
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Post by jeffyscott » Tue Dec 22, 2009 1:51 pm

Advantage: VIPSX :wink:

Too bad there is not a short tips fund.

Many years ago, I heard a HY fund manager state that her fund provides liquidity, even when it does not exist in the market you still get to redeem at NAV. I would not have thought liquidity would ever be an issue for TIPS, though.
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Post by Tramper Al » Tue Dec 22, 2009 2:08 pm

jeffyscott wrote:I would not have thought liquidity would ever be an issue for TIPS, though.
Well, I think there is true (big market, institutional) liquidity, and then there is the sort of thing we retail investors have to contend with when we buy/sell through our various brokerages.

For example, a couple of years ago I had $400K in cash at Fidelity, just for a few weeks. I bought 400 T-Bills maturing in something like 20 days. About as liquid as you can be, right? I got a decent execution on the buy, I thought. Then with about 10 days to maturity I went to sell. Bid and ask were right up there, no problem. But when I placed limit orders to sell, I could not give those T-Bills away -- to the Fidelity bond desk. Or rather I nearly had to. I ended up having to take less than the bid, if you can imagine.

I've had similar experiences with TIPS on occasion too. The message coming back from the bond desk was essentially "not today".
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Post by Lucio » Tue Dec 22, 2009 2:10 pm

jeffyscott wrote:Advantage: VIPSX :wink:

Too bad there is not a short tips fund.
There is the PIMCO 1-5 Year US TIPS Index ETF (STPZ) with and expense ratio of 0.20%.

Similar funds are offer for long-term TIPS, LTPZ with a nominal duration of 15 years.

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Re: No quotes on short TIPS

Post by ddb » Tue Dec 22, 2009 2:16 pm

Doc wrote:I've been letting my MM balances get depleted and have been relying on short TIPS for emergencies.In doing some end of year planning I needed cash and found NO BIDS for short TIPS at Fidelity, Schwab or Vanguard. I haven't called any bond desks yet as I'm still doing planning but this is very troublesome. Any thoughts?
How short-term are we talking?

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Post by jeffyscott » Tue Dec 22, 2009 2:50 pm

Interesting comments about the potential lack of liquidity for even t-bills for us little guys.

WRT, the ST TIPS ETF, could that not also suffer from a lack of liquidity? I would guess the trading volume is pretty small?

I think only open ended funds give you near certainty of liquidity. They do have the option to do redemptions in kind, but that is actually less likely to be done to us little guys than to the big investors by an open ended fund.
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Post by Tramper Al » Tue Dec 22, 2009 3:04 pm

jeffyscott wrote:I think only open ended funds give you near certainty of liquidity.
I'd go along with that. However, I have had a fund manager's assistant call to inform me that the manager is under no obligation to execute the share redemption order I just placed, since "large transactions can be disruptive". Please. That was at Vanguard, of course.

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Post by jeffyscott » Tue Dec 22, 2009 3:19 pm

Good point, I believe I've seen something like: "if your transaction request is accepted..." at another fund company's website when submitting a transaction.
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Re: No quotes on short TIPS

Post by Doc » Wed Dec 23, 2009 9:30 am

ddb wrote:
Doc wrote:I've been letting my MM balances get depleted and have been relying on short TIPS for emergencies.In doing some end of year planning I needed cash and found NO BIDS for short TIPS at Fidelity, Schwab or Vanguard. I haven't called any bond desks yet as I'm still doing planning but this is very troublesome. Any thoughts?
How short-term are we talking?

- DDB
I wasn't paying a lot of attention to the exact cut off but I think anything before 7/2013 was missing.

Got through to bond desks at Vg and Schwab. The problem is that the offer yields are negative. Vg got a quote on the Jan 2011 from Bloomberg and Schwab got one "on the wire" $15k. Negative yield of 0.309%. Didn't get any spreads. Bond desks don't like talking to retail customers. Which is find since I don't like talking to them either. I think too slow. The high rate on this weeks 91 day t-bill was 0.07. The 0.01 seven day yield on Treasury MM is starting to look pretty good as long as they don't break the buck.
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Post by Chuck » Wed Dec 23, 2009 10:08 am

jeffyscott wrote: Too bad there is not a short tips fund.
Haha, I thought you wanted to short sell TIPS. I thought that was crazy.

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Post by jeffyscott » Wed Dec 23, 2009 10:16 am

Chuck wrote:
jeffyscott wrote: Too bad there is not a short tips fund.
Haha, I thought you wanted to short sell TIPS. I thought that was crazy.
:lol:

I guess I should have said "short-term..."

But, since there is a short TIPS ETF, I guess it is now even possible to short short TIPS.
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Post by Valuethinker » Wed Dec 23, 2009 10:39 am

jeffyscott wrote:Advantage: VIPSX :wink:

Too bad there is not a short tips fund.

Many years ago, I heard a HY fund manager state that her fund provides liquidity, even when it does not exist in the market you still get to redeem at NAV. I would not have thought liquidity would ever be an issue for TIPS, though.
There is a hostage to fortune if I ever heard one!

You want to bet, that if there was a serious crisis, HY funds would (as the first, and nearly the largest, money market fund did) find a way to halt redemptions?

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Money Funds and Negative Yields:

Post by Barry Barnitz » Wed Dec 23, 2009 10:51 am

Hi:

One likely solution to the negative net yield situation for a money market fund is to access a negative yield dividend or implement a daily reverse share split.
See Morgan Lewsi: Implications of Negative Yield on Money Funds

* Assess Negative Dividends. One possibility that has been suggested as a way to reduce shares outstanding in order to compensate for investment loss caused by negative yield is for a money fund to assess a charge to investors, payable in shares, for each day that the fund is in negative yield position. In this method, any daily negative yields would be offset by such charges, while daily positive yields accrued during the same month would be declared as dividends. On a monthly basis, shareholders would “pay” any net negative yield (the difference between the amount of daily negative yield and the amount of daily positive yields) to the fund in the form of shares. This approach would have the effect of creating a “negative dividend.” Funds considering this approach should make sure that their governing documents allow recoupment of the negative yield from the dividends otherwise earned or accrued during the month. Such a negative dividend would be calculated daily and assessed pro rata against all fund classes. To our knowledge, this solution was most recently proposed by Peter Crane of Crane Data LLC, a money market fund research entity. See Christopher Condon, Money-Market Fund Yields May Fall to Less Than Zero, bloomberg.com, Dec. 10, 2008, available at http://www.bloomberg.com/apps/news?pid= ... refer=home.
* Calculate a Daily Reverse Share Split. In the same vein as a daily negative dividend calculation, another way to potentially reduce the number of shares outstanding in order to maintain a $1.00 per share net asset value is for funds to effect a reverse share split periodically. Such a reverse share split would stabilize net asset value at $1.00 per share, but would result in each shareholder owning a fraction of the shares held prior to the reverse split. For example, if a fund has a -0.15% negative yield, the fund could effect a reverse split so that each investor in the fund would own 0.985 shares worth $1.00 per share instead of 1 share worth $0.985). Such a reverse share split is probably the most feasible means of addressing negative yield without breaking the buck because most fund governing documents allow for boards to implement share splits and reverse splits within their reasonable business judgment.

Regardless of the option selected, it is critical that money funds consider the need to disclose to investors the implementation of any potential actions to eliminate negative yield or maintain a stable net asset value of $1.00 per share. This disclosure could be provided through a prospectus supplement, as well as website disclosure, as appropriate.
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Post by Doc » Wed Dec 23, 2009 11:45 am

FWIW, referring to Schwab U.S. Treasury Money Fund

From Schwab's website:
Schwab and the investment adviser have voluntarily waived and/or reimbursed expenses in excess of their current contractual commitment in an effort to maintain certain net yields for the fund.
The seven day yield is 0.01 which seems to be typical for several MM as someone noted above. A for profit adviser may have a little more leeway at "maintaing certain net yields" than an "owned by fund investors" firm like Vanguard.
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Post by Tramper Al » Wed Dec 23, 2009 11:51 am

Doc wrote:FWIW, referring to Schwab U.S. Treasury Money Fund

From Schwab's website:
Schwab and the investment adviser have voluntarily waived and/or reimbursed expenses in excess of their current contractual commitment in an effort to maintain certain net yields for the fund.
The seven day yield is 0.01 which seems to be typical for several MM as someone noted above. A for profit adviser may have a little more leeway at "maintaing certain net yields" than an "owned by fund investors" firm like Vanguard.
Yes, the MMF option within the Vanguard Variable Annuity recently started paying a negative yield after a period of about 3 months of "maintaing a certain net yield" of exactly 0.000000%. The higher expenses of the VA structure got them there a little more quickly, I suppose. Perhaps this may come up in 529 MMFs as well.

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Re: Money Funds and Negative Yields:

Post by Chuck » Wed Dec 23, 2009 11:53 am

Barry Barnitz wrote:One likely solution to the negative net yield situation for a money market fund is to access a negative yield dividend or implement a daily reverse share split.
It's just games at that point. The end result is the same.

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Post by Ariel » Wed Dec 23, 2009 11:54 am

All these zero and slightly negative yields on short-term, secure, and liquid investments is what Japan faced when their stock-market crashed. And we all know how well that that has turned out for investors there :oops: :cry:
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Post by ruud » Wed Dec 23, 2009 1:07 pm

Tramper Al wrote:Perhaps this may come up in 529 MMFs as well.
strangely enough, the vanguard 529 interest accumulation portfolio shows a yield of 0.81% (source)

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Post by jeffyscott » Wed Dec 23, 2009 1:17 pm

Valuethinker wrote: You want to bet, that if there was a serious crisis, HY funds would (as the first, and nearly the largest, money market fund did) find a way to halt redemptions?
The comment was really related to the fact that even under normal circumstances the HY market is illiquid and investing via a fund provides the liquidity that is lacking in the actual market. If you have $50,000 in HY bonds that you own directly and decide you want to sell $10,000 of these it is going to be a lot more difficult and costly than redeeming shares of a HY fund.

Right here and now we have a poster who is having liquidity problems with TIPS :!: Meanwhile he could sell a bit of a HY fund, an EM fund, or a microcap fund with absolutely no problem.

Open ended funds do provide liquidity, it is not perfect and there are no guarantees, but they are almost always more liquid than other forms of securities ownership.

The problem with the MM fund was breaking the buck creating a run on the fund, if there was not an expectation of $1 per share and instead the norm was that MM funds marked to market there may not have been a need to halt redemptions.
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Post by Doc » Wed Dec 23, 2009 1:57 pm

jeffyscott wrote:
Right here and now we have a poster who is having liquidity problems with TIPS :!: Meanwhile he could sell a bit of a HY fund, an EM fund, or a microcap fund with absolutely no problem.
Jeffy, if you mean me I need to restate what is happening. The various sources are not posting short TIPS quotes because the yields are negative and they want you to talk to someone less you make a mistake. Nominal Treasuries probably also have a negative real yield through three years. The TIPS market is still liquid according to the bond desk I asked directly. She assuaged my liquidity concerns. The rep to whom I suggested there was a liquidity issue agreed with me. (Which gave me lots of confidence in that firm. :roll: )
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Post by jeffyscott » Wed Dec 23, 2009 2:18 pm

Thanks for explaining, Doc. So it is just a hassle factor, not liquidity.

I assume the real yield is negative, but that it is known that the total return will be positive, due to the inflation factor?
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Post by Doc » Wed Dec 23, 2009 2:37 pm

jeffyscott wrote:I assume the real yield is negative, but that it is known that the total return will be positive, due to the inflation factor?
I expect the yield is almost exactly the same as the nominal Treasury with the same maturity. And if is not what I expect, I don't care because I bought insurance for that event. :D

When I bought these notes the maturity was long(er) and I wanted the insurance against the unexpected. Now that the maturities are short I can get the same result with short nominals. If I needed cash I would sell an entire issue, take out what I needed and reinvest the rest in a short Treasury fund.
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