Muni mm keeps dropping in yield, thinking of switching

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am
Posts: 2578
Joined: Sun Sep 30, 2007 9:55 am

Muni mm keeps dropping in yield, thinking of switching

Post by am » Sat May 26, 2018 4:00 pm

So now we’re at 1.22 sec yield which is TEY for me of 2.06% fast approaching the prime mm (use https://funds.eatonvance.com/tax-equiva ... ulator.php). Interesting how any free lunches in investing go away quickly. First got the muni mm at sec yield of 1.55 and it’s been falling without end the last couple of weeks even though short term rates are unchanged,

I am looking for something with a more stable yield. The savings accounts are too low, with Amex savings at 1.6. I was thinking of something like short term muni or limited term muni but don’t want to buy into something with falling yield like muni mm. This money is for short term uses. Say a roof, new car, time between jobs, I can tolerate some fluctuation in principle. Thanks.

venkman
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Re: Muni mm keeps dropping in yield, thinking of switching

Post by venkman » Sat May 26, 2018 11:03 pm

The problem with bonds is that stability of income is inversely correlated with stability of principal. (i.e. A long-term bond will guarantee a certain level of income for decades, but its market value will fluctuate greatly with changes in interest rates. A short-term bond's market value will be relatively stable, but you're only guaranteed that bond's yield for a few years.)

Basically, you have to decide what level of principal fluctuation you're willing to accept, and choose a bond fund accordingly.

Yield on Vanguard's Muni MM Fund tends to cycle up and down. It started the year at 1.40%, dropped to 0.91% in mid-February, climbed back to a peak of 1.55% in April, and has since dropped down to 1.22%. The important number is its YTD return, 0.48%. Compare that to the Prime MM's YTD return of 0.65%. That's right around the 25% breakeven point where after-tax return on muni and taxable bonds tends to be a wash. Going forward, I would expect the return on the muni MM to be 75% of the return of Prime MM. Prime MM currently yields 1.88%, so I would expect the Muni MM to yield about 1.41%. (As of now. Obviously, that number will change as short-term rates rise, but I would still expect the relationship to hold.)

am
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Joined: Sun Sep 30, 2007 9:55 am

Re: Muni mm keeps dropping in yield, thinking of switching

Post by am » Sun May 27, 2018 8:04 am

venkman wrote:
Sat May 26, 2018 11:03 pm
The problem with bonds is that stability of income is inversely correlated with stability of principal. (i.e. A long-term bond will guarantee a certain level of income for decades, but its market value will fluctuate greatly with changes in interest rates. A short-term bond's market value will be relatively stable, but you're only guaranteed that bond's yield for a few years.)

Basically, you have to decide what level of principal fluctuation you're willing to accept, and choose a bond fund accordingly.

Yield on Vanguard's Muni MM Fund tends to cycle up and down. It started the year at 1.40%, dropped to 0.91% in mid-February, climbed back to a peak of 1.55% in April, and has since dropped down to 1.22%. The important number is its YTD return, 0.48%. Compare that to the Prime MM's YTD return of 0.65%. That's right around the 25% breakeven point where after-tax return on muni and taxable bonds tends to be a wash. Going forward, I would expect the return on the muni MM to be 75% of the return of Prime MM. Prime MM currently yields 1.88%, so I would expect the Muni MM to yield about 1.41%. (As of now. Obviously, that number will change as short-term rates rise, but I would still expect the relationship to hold.)
How about the short term muni and limited term muni? Do they cycle in yield like muni mm for no obvious reason? Do you think they are a decent choice for short to interm. cash needs?

venkman
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Re: Muni mm keeps dropping in yield, thinking of switching

Post by venkman » Sun May 27, 2018 11:42 pm

am wrote:
Sun May 27, 2018 8:04 am
How about the short term muni and limited term muni? Do they cycle in yield like muni mm for no obvious reason? Do you think they are a decent choice for short to interm. cash needs?
The price/yield of those funds will fluctuate with short-term interest rate changes, but I would feel fine holding short-term funds in either one.

am
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Joined: Sun Sep 30, 2007 9:55 am

Re: Muni mm keeps dropping in yield, thinking of switching

Post by am » Wed May 30, 2018 3:28 pm

Muni mm yield at vanguard down to 1.15% :(

Now there’s almost no advantage for me when compared to prime mm at my bracket of 32%. Thinking of switching to short to Limited term muni?.

Random Poster
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Re: Muni mm keeps dropping in yield, thinking of switching

Post by Random Poster » Wed May 30, 2018 3:47 pm

am wrote:
Wed May 30, 2018 3:28 pm
Muni mm yield at vanguard down to 1.15% :(

Now there’s almost no advantage for me when compared to prime mm at my bracket of 32%.
You sure about that?

As I recall, tax-exempt interest is not subject to the Net Investment Income Tax, and if you have a lot of interest (or dividend, or royalty) income and would otherwise be subject to such a tax, that exemption could come in handy.

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