Muni Money Market funds starting to look good!

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zzz
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Re: Muni Money Market funds starting to look good!

Post by zzz » Sun Apr 15, 2018 11:27 pm

I was talking about money markets which would be taxed as ordinary income at your ordinary income rate. Interest or dividend rates would not be added to ordinary income rates. If you were in the 12% ordinary income bracket and 15% in the qualified dividend bracket you would not pay 27% on ordinary income, interest or dividends. $100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
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ofckrupke
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Re: Muni Money Market funds starting to look good!

Post by ofckrupke » Mon Apr 16, 2018 12:00 am

zzz wrote:
Sun Apr 15, 2018 11:27 pm
$100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
But for someone with ordinary income in the 12% bracket and with QDIV/LTCG draped atop that into the 15% QDIV bracket (so that some of the QDIV was taxed at 0% and some at 15%), $100 more ordinary interest would cause $12 more ordinary interest taxation and would also push $100 of the QDIV out of 0% taxation and into 15% taxation, so the resulting increase in federal tax would be $27. And that's where Kevin finds himself.

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Re: Muni Money Market funds starting to look good!

Post by zzz » Mon Apr 16, 2018 12:16 am

Thanks for responding. Our tax system is even more insidious than I imagined.
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Kevin M
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Re: Muni Money Market funds starting to look good!

Post by Kevin M » Mon Apr 16, 2018 5:17 pm

ofckrupke wrote:
Mon Apr 16, 2018 12:00 am
zzz wrote:
Sun Apr 15, 2018 11:27 pm
$100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
But for someone with ordinary income in the 12% bracket and with QDIV/LTCG draped atop that into the 15% QDIV bracket (so that some of the QDIV was taxed at 0% and some at 15%), $100 more ordinary interest would cause $12 more ordinary interest taxation and would also push $100 of the QDIV out of 0% taxation and into 15% taxation, so the resulting increase in federal tax would be $27. And that's where Kevin finds himself.
Hmm, I thought that's basically what I said, but I guess you did a better job of explaining it in a way that zzz understood.

For anyone who wants to see this effect without understanding exactly how it works, run TaxCaster, enter MFJ filing status, ages 30,30, enter 0 for everything until you get to the "Select from all that apply to you ..." screen, select "Have investments" then continue, then enter 0's until you get to Taxable Interest. Enter 50,000 for taxable interest, then 50,000 for qualified dividends (but don't leave this screen). You will see tax of 3,946. Now click Back and enter 51,000 for taxable interest, and your tax will increase to 4,246, which is 300 more. So you added 1,000 of ordinary income, and you were taxed 300 more, which is 30%. This is 15% tax on the interest and 15% of additional QD taxed at 15%. In 2018 the ordinary income will be taxed at 12% instead.

Of course there are other ways you could enter data into TaxCaster to see the effect, but I just choose the quickest and easiest with minimal data entry.

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Re: Muni Money Market funds starting to look good!

Post by zzz » Tue Apr 17, 2018 12:02 pm

It is what you said, I just had trouble believing it actually was that bad.
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Re: Muni Money Market funds starting to look good!

Post by Riley15 » Tue Apr 17, 2018 1:09 pm

Kevin M wrote:
Mon Apr 16, 2018 5:17 pm
ofckrupke wrote:
Mon Apr 16, 2018 12:00 am
zzz wrote:
Sun Apr 15, 2018 11:27 pm
$100 of ordinary interest would pay 12% or $12 in a 12% ordinary income bracket, not $27.
But for someone with ordinary income in the 12% bracket and with QDIV/LTCG draped atop that into the 15% QDIV bracket (so that some of the QDIV was taxed at 0% and some at 15%), $100 more ordinary interest would cause $12 more ordinary interest taxation and would also push $100 of the QDIV out of 0% taxation and into 15% taxation, so the resulting increase in federal tax would be $27. And that's where Kevin finds himself.
Hmm, I thought that's basically what I said, but I guess you did a better job of explaining it in a way that zzz understood.

For anyone who wants to see this effect without understanding exactly how it works, run TaxCaster, enter MFJ filing status, ages 30,30, enter 0 for everything until you get to the "Select from all that apply to you ..." screen, select "Have investments" then continue, then enter 0's until you get to Taxable Interest. Enter 50,000 for taxable interest, then 50,000 for qualified dividends (but don't leave this screen). You will see tax of 3,946. Now click Back and enter 51,000 for taxable interest, and your tax will increase to 4,246, which is 300 more. So you added 1,000 of ordinary income, and you were taxed 300 more, which is 30%. This is 15% tax on the interest and 15% of additional QD taxed at 15%. In 2018 the ordinary income will be taxed at 12% instead.

Of course there are other ways you could enter data into TaxCaster to see the effect, but I just choose the quickest and easiest with minimal data entry.

Kevin
I am not sure if I am still understanding this correctly. If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k. If you add another $100 to your ordinary income and still stay in the 12% tax bracket, I don't see why this should affect the QDIV/LTCP tax rate?

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Re: Muni Money Market funds starting to look good!

Post by mega317 » Tue Apr 17, 2018 2:35 pm

Riley15 wrote:
Tue Apr 17, 2018 1:09 pm
If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k.
That is not true. Work through a dummy 1040 line 44 and schedule D.

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Re: Muni Money Market funds starting to look good!

Post by Kevin M » Tue Apr 17, 2018 3:45 pm

mega317 wrote:
Tue Apr 17, 2018 2:35 pm
Riley15 wrote:
Tue Apr 17, 2018 1:09 pm
If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k.
That is not true. Work through a dummy 1040 line 44 and schedule D.
Yes, using the Schedule D worksheet is a good way to see how the calculation works. This is a deeper dive than simply using TaxCaster to prove to yourself that it actually does work this way--you should at least try the latter if you don't believe it.

Using the 2017 forms and worksheets the bracket we're discussing is 15%, which will be 12% in 2018, but the QD/LTCG rate we're discussing remains at 15% for 2018. Also, the dividing line between 12% and 22% ordinary income brackets and 0% and 15% QD/LTCG brackets is slightly different, but for conceptual purposes we can ignore it. The principal works basically the same for 2018 as for 2017, keeping these differences in mind.

I'll use the numbers I threw out earlier and run it through a dummy 2017 tax return using HRBlock software. I enter 50,000 of interest income and 50,000 of qualified dividends. This is an adjusted gross income (AGI) of $100K.

For two married 30-year olds filing a joint return (MFJ), standard deduction is 12,700 and exemption amount is 8,100, leaving 79,200 of taxable income. This is entered on Line 1 of the Schedule D Tax Worksheet, which is used to calculate your tax if you have QD and/or LTCG and no depreciation recapture.

Subtracting the 50,000 of QD leaves 29,200 of income taxed at ordinary rates. Next, subtract 29,200 from 75,900 (top of 15% bracket for MFJ) to get 46,700 of QD that is taxed at 0%. This leaves 3,300 of QD taxed at 15%. Since 29,200 is above the top of the 2017 10% bracket, 18,650, your marginal tax rate on ordinary income is 15%.

You can visualize this as the QD/LTCG stacked on top of the ordinary income. Whatever part of the QD/LTCG stack is above the top of the 15% bracket is taxed at 15%, and whatever is below is taxed at 0%. Every extra dollar of ordinary income pushes a dollar of LTCG/QD above the top of the 15% bracket, and thus an extra dollar of LTCG/QD is taxed at 15% instead of 0%, and the extra dollar of ordinary income is taxed at 15%, for total marginal tax rate of 30% (27% in 2018).

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Re: Muni Money Market funds starting to look good!

Post by kaneohe » Tue Apr 17, 2018 4:01 pm

Riley15 wrote:
Tue Apr 17, 2018 1:09 pm
........................................................

I am not sure if I am still understanding this correctly. If you are in the 12% tax bracket for ordinary income, any amount of QDIV/LTCP should be taxed at the 0% rate correct. Whether it is 20k or 200k. If you add another $100 to your ordinary income and still stay in the 12% tax bracket, I don't see why this should affect the QDIV/LTCP tax rate?
Kevin has written a very detailed explanation of this. The stacked bar chart is a very nice way of visualizing things. For a real picture, see tfb's chart here posted 12/11/11 viewtopic.php?t=86849

Your misconception is fairly common when reading just words.....it could be either the words
or the reader's misunderstanding of the words. The basic concept is that the determination
of the QDIV/LTCG rate is determined by the tax bracket of the taxable income INCLUDING the QDIV/LTCG, not just the ordinary income. The misconception is that if ordinary income is in the 12% bracket, QDIV/LTCG rate is 0% regardless of how large the QDIV/LTCG gain . This is not true because the QDIV/LTCG raises the tax bracket of the taxable income even tho the ordinary income may remain in the lower bracket.

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Re: Muni Money Market funds starting to look good!

Post by neurosphere » Thu Apr 19, 2018 9:23 am

Just for fun, I plotted the SEC yields for the Vanguard NY Municipal bond fund vs those for the Limited and Short Term Tax Exempt bond funds. I converted the yields into taxable equivalent yields for the highest tax brackets for IRS and NYS/NYC (I used 37% federal and 12% NYS/NYC). I did not take into account any additional medicare tax or net investment income tax. I also did not attempt to deal with any NY income in the national funds which would be tax free to a NY/NYC resident.

I'm curious how long this small yield spread between muni MM funds and other funds will persist.

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Re: Muni Money Market funds starting to look good!

Post by Voltron » Thu Apr 19, 2018 12:51 pm

I always see posters create nice graphs. What resource do use to create the graph? Visualization is helpful.

What I want to do is create a graph for example a California resident in different federal tax brackets. It might help me decide my goals.

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Re: Muni Money Market funds starting to look good!

Post by neurosphere » Thu Apr 19, 2018 12:58 pm

Voltron wrote:
Thu Apr 19, 2018 12:51 pm
I always see posters create nice graphs. What resource do use to create the graph? Visualization is helpful.

What I want to do is create a graph for example a California resident in different federal tax brackets. It might help me decide my goals.
I used excel 2016.
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Re: Muni Money Market funds starting to look good!

Post by bligh » Tue Apr 24, 2018 11:10 am

Is the quarter end bump still going on?

I took a look at the muni money market funds and the SEC yields are superb (compared to Savings accounts if you are in a higher tax bracket of course)..

VMSXX (Muni Money Market) - 1.54%
VCTXX (CA Muni Money Market) - 1.46%
VYFXX (NY Muni Money Market) - 1.53%

If these yields aren't just a temporary quarter end spike, this is great. It is almost catching up to the yield of the Vanguard short term tax exempt bond fund. Remember though, you're still loosing to inflation but the cost is a lot less than before.

The place I am currently parking my Cash reserves is VMLUX (Limited term tax exempt).. there is hardly any NAV movement and the current yield (2.06%). Finally I can once again hold liquid cash that keeps up with inflation!*


* I do max out I-Bonds but they are not part of my cash reserves.

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Re: Muni Money Market funds starting to look good!

Post by crystalbank » Tue Apr 24, 2018 11:19 am

bligh wrote:
Tue Apr 24, 2018 11:10 am
Is the quarter end bump still going on?

I took a look at the muni money market funds and the SEC yields are superb (compared to Savings accounts if you are in a higher tax bracket of course)..

VMSXX (Muni Money Market) - 1.54%
VCTXX (CA Muni Money Market) - 1.46%
VYFXX (NY Muni Money Market) - 1.53%

If these yields aren't just a temporary quarter end spike, this is great. It is almost catching up to the yield of the Vanguard short term tax exempt bond fund. Remember though, you're still loosing to inflation but the cost is a lot less than before.

The place I am currently parking my Cash reserves is VMLUX (Limited term tax exempt).. there is hardly any NAV movement and the current yield (2.06%). Finally I can once again hold liquid cash that keeps up with inflation!*


* I do max out I-Bonds but they are not part of my cash reserves.
Thanks for the VMLUX tip. I think it's a better yield for CA investors than CA Muni Money Market to put cash reserves.

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Re: Muni Money Market funds starting to look good!

Post by Kevin M » Tue Apr 24, 2018 5:33 pm

crystalbank wrote:
Tue Apr 24, 2018 11:19 am
bligh wrote:
Tue Apr 24, 2018 11:10 am
The place I am currently parking my Cash reserves is VMLUX (Limited term tax exempt).. there is hardly any NAV movement and the current yield (2.06%). Finally I can once again hold liquid cash that keeps up with inflation!*
Thanks for the VMLUX tip. I think it's a better yield for CA investors than CA Muni Money Market to put cash reserves.
VMLUX is not cash, it's bonds. Of course the yield is better than a MM fund--you're getting compensated for taking some term risk and some credit risk.

NAV is not stable. It has declined from 10.90 on 1/8/2018 to 10.80 yesterday, so capital return of -0.92% (so a loss of almost 1%). Yield on 1/8/2018 was 1.78%, so you've lost about half of your expected return in less than four months.

Average duration of the fund is 2.5 years, so you really can't compare to a fund with a duration of 0-years. I have been buying 2-year to 3-year AA/AAA munis, and of course am getting higher yields than in CA muni MM at the time of purchase--I wouldn't buy them otherwise. But I don't consider them cash, other than maybe the ones maturing within a month (that I bought maybe three months ago, and at the time weren't cash).

I bought some of this fund in January 2018, and added a little bit to it in February. My capital return is -$637.56 and my income return is +$280.18, for total return of -$357.38. That's not cash.

Kevin
Last edited by Kevin M on Tue Apr 24, 2018 7:48 pm, edited 1 time in total.
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Re: Muni Money Market funds starting to look good!

Post by invstar » Tue Apr 24, 2018 6:02 pm

I am looking at a Aa2/AA muni bond (CUSIP: 839278EP9) and it contains "Subject To - Sinking Fund 11/18@89.49" in it's description. What does it mean? Can I buy it? Issue name is South Pasadena Calif Uni Sch Dist - Election Of 1995.

Thanks.

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Re: Muni Money Market funds starting to look good!

Post by zzz » Tue Apr 24, 2018 7:05 pm

Kevin M wrote:
Tue Apr 24, 2018 5:33 pm
crystalbank wrote:
Tue Apr 24, 2018 11:19 am
bligh wrote:
Tue Apr 24, 2018 11:10 am
The place I am currently parking my Cash reserves is VMLUX (Limited term tax exempt).. there is hardly any NAV movement and the current yield (2.06%). Finally I can once again hold liquid cash that keeps up with inflation!*
Thanks for the VMLUX tip. I think it's a better yield for CA investors than CA Muni Money Market to put cash reserves.
VMLUX is not cash, it's bonds. Of course the yield is better than a MM fund--you're getting compensated for taking some term risk and some credit risk.

NAV is not stable. It has declined from 10.90 on 1/8/2018 to 10.80 yesterday, so capital return of -0.92% (so a loss of almost 1%). Yield on 1/8/2018 was 1.78%, so you've lost about half of your expected return in less than four months.

Average duration of the fund is 2.5 years, so you really can't compare to a fund with a duration of 0-years. I have been buying 2-year to 3-year AA/AAA munis, and of course am getting higher yields than in CA muni MM at the time of purchase--I wouldn't buy them otherwise. But I don't consider them cash, other than maybe the ones maturing within a month (that I bought maybe three months ago, and at the time weren't cash).

I bought some of this fund in January 2018, and added a little bit to it in February. My capital return is -$637.56 and my income return is +$280.18, for total return of -$357.38. That's not cash.

Kevin

Kevin
Absolutely, if interest rates are going up, the principal of bonds are going down. With rates rising, the money market is the best place to be , unless you believe rates have peaked, in which case you would want a longer duration fund than that. That said, I do have some VMLUX myself in case I'm wrong about rates going up :wink: (but I don't have anything with a longer duration).
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Re: Muni Money Market funds starting to look good!

Post by bligh » Tue Apr 24, 2018 7:16 pm

Kevin M wrote:
Tue Apr 24, 2018 5:33 pm
crystalbank wrote:
Tue Apr 24, 2018 11:19 am
bligh wrote:
Tue Apr 24, 2018 11:10 am
The place I am currently parking my Cash reserves is VMLUX (Limited term tax exempt).. there is hardly any NAV movement and the current yield (2.06%). Finally I can once again hold liquid cash that keeps up with inflation!*
Thanks for the VMLUX tip. I think it's a better yield for CA investors than CA Muni Money Market to put cash reserves.
VMLUX is not cash, it's bonds. Of course the yield is better than a MM fund--you're getting compensated for taking some term risk and some credit risk.

NAV is not stable. It has declined from 10.90 on 1/8/2018 to 10.80 yesterday, so capital return of -0.92% (so a loss of almost 1%). Yield on 1/8/2018 was 1.78%, so you've lost about half of your expected return in less than four months.

Average duration of the fund is 2.5 years, so you really can't compare to a fund with a duration of 0-years. I have been buying 2-year to 3-year AA/AAA munis, and of course am getting higher yields than in CA muni MM at the time of purchase--I wouldn't buy them otherwise. But I don't consider them cash, other than maybe the ones maturing within a month (that I bought maybe three months ago, and at the time weren't cash).

I bought some of this fund in January 2018, and added a little bit to it in February. My capital return is -$637.56 and my income return is +$280.18, for total return of -$357.38. That's not cash.

Kevin

Kevin
Agreed. If you cannot tolerate even a little NAV instability, I definitely wouldn't recommend it. However my cash reserves don't need to be an exact dollar amount, the NAV is stable enough that I could sell part of my holdings in a pinch without taking a huge hit. I look at it as a choice between a guaranteed negative real return on my cash reserves in a money market fund, vs a possible negative real return in VMLUX. If someone wants to make a bet on which direction interest rates are moving short term that is up to them.

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Re: Muni Money Market funds starting to look good!

Post by Kevin M » Tue Apr 24, 2018 8:00 pm

bligh wrote:
Tue Apr 24, 2018 7:16 pm
If you cannot tolerate even a little NAV instability, I definitely wouldn't recommend it.
The issue isn't ability to tolerate NAV instability, the issue is that your definition of cash or short-term reserves is way off the mark (Vanguard only classifies money market funds as short-term reserves). I wouldn't call a loss of almost 1% in less than four months "a little NAV instability" with initial yield at about 1.8%. Losing 50% of your initial yield in four months is not a little NAV instability.

I can tolerate NAV instability in my bond funds--I expect it. I just don't call my bond funds cash. My definition of cash is something with no term risk.

Some people consider any fixed income with maturity of less than one year cash (and even by this definition VMLUX would not qualify), but I don't. A 1-year Treasury I might have bought at 1.7% in December has lost value with the 6-month yield now at 2.05%. For me, cash does not lose nominal value.

This thread is about muni money market yields looking good compared to other actual "cash" alternatives, like bank accounts. Cash has no term risk, and VMLUX has significant term risk compared to no term risk.

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Re: Muni Money Market funds starting to look good!

Post by bligh » Wed Apr 25, 2018 11:43 am

Kevin M wrote:
Tue Apr 24, 2018 8:00 pm
bligh wrote:
Tue Apr 24, 2018 7:16 pm
If you cannot tolerate even a little NAV instability, I definitely wouldn't recommend it.
The issue isn't ability to tolerate NAV instability, the issue is that your definition of cash or short-term reserves is way off the mark (Vanguard only classifies money market funds as short-term reserves). I wouldn't call a loss of almost 1% in less than four months "a little NAV instability" with initial yield at about 1.8%. Losing 50% of your initial yield in four months is not a little NAV instability.

I can tolerate NAV instability in my bond funds--I expect it. I just don't call my bond funds cash. My definition of cash is something with no term risk.

Some people consider any fixed income with maturity of less than one year cash (and even by this definition VMLUX would not qualify), but I don't. A 1-year Treasury I might have bought at 1.7% in December has lost value with the 6-month yield now at 2.05%. For me, cash does not lose nominal value.

This thread is about muni money market yields looking good compared to other actual "cash" alternatives, like bank accounts. Cash has no term risk, and VMLUX has significant term risk compared to no term risk.

Kevin
I respect your definition of Cash (or more accurately cash equivalents.. since literal cash is bank notes and coins sitting in a drawer).. , and don't think it is incorrect. However it isn't the only definition for it..

For example, here is a link to the latest Apple's recent 10-K Filing with the SEC : http://files.shareholder.com/downloads/ ... Filed_.pdf .

If you scroll down to page 49 the section on "Note 2 – Financial Instruments Cash, Cash Equivalents and Marketable Securities". You'll notice that when people refer to Apple's "$280 billion cash hoard" .. they include Corporate Bonds (the vast majority), Municipal bonds, treasuries, Mortgage backed securities, etc. They even give you the approximate duration - "The maturities of the Company’s long-term marketable securities generally range from one to five years." They hold only about $9B in cash and $8B in Money market funds. Do a google search, you wont find a single news story talking about "Apple's $17B Cash hoard". I bet you would see something similar for any other company when it refers to its cash reserves.

Cash reserves can be (and are) kept in tiers. I have my checking accounts, I have my savings accounts/mm funds, or Short term bond funds. I am choosing to hold my cash reserves at a tier slightly lower than a money market right now, I am accepting a little term risk or minor NAV instability as part of it. I may even split my cash reserves between Money Market and Short term bond funds if the interest rate rises further.

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Re: Muni Money Market funds starting to look good!

Post by Kevin M » Wed Apr 25, 2018 2:22 pm

Like I said, institutional investors might define cash as any low credit risk fixed-income security with maturity of less than one year. Apple takes it much further, which makes little sense to me, but as long as one defines what one means by cash, the impacted parties understand.

I tend to just think in terms of fixed income, and then evaluate credit risk and term risk. This thread is about muni money market funds, so 0-year duration and minimal term risk. I don't see much point in bringing bond funds into the discussion.

I have another thread going on muni bonds, one on CDs, and one on yield curves. In all of these I'm mentioning that maturities of less than three years look the best in terms of reward/risk, since yield curves are relatively steep in that range, and relatively flat beyond that. Limited-term muni fund fits in those contexts (and as I mentioned, I own some). Why don't you jump on over to the muni bond thread and we can debate the merits of limited-term muni fund vs. individual munis: viewtopic.php?f=10&t=246916 .

Or jump on over to the yield curve thread, and we can debate how much sense it makes to extend maturity beyond three years, as limited-term bond fund does with about 50% of its holdings (and 27% more than 5-year maturity). viewtopic.php?f=10&t=247796 .

At any rate, by your definition, I have a huge amount of short-term reserves--call it second-level if you want--but I certainly don't think of any of those holdings as cash.

No way am I dipping into my limited-term bond fund after it's lost almost 1% in value since I bought it (unless I wanted to harvest the tax loss). Nor will I be selling any of my individual CDs, Treasuries, or muni bonds before maturity. Some of those munis will start maturing next month, and I have a large amount of CDs in taxable maturing later this year. Any excess liquidity needs before then will be met from my CA muni MM fund, which hasn't lost a penny, and of course is only increasing in value as dividends are accrued daily.

A common guideline is to match duration of assets to duration of liabilities. With a duration of 2.5 years, limited-term bond fund is more appropriate to meet liabilities in a few years than in a few months. Of course you and anyone else is free to do whatever you want, regardless of how rational or irrational it is.

With respect to losing to inflation, you've been losing even more to inflation with VMLUX in recent months than with a muni money market fund. Even in the last year this is true, with the 1-year returns of muni money market funds being higher than that of limited-term or short-term muni bond fund.

I also can sell stocks if I want to raise cash, so it's all reserves of some sort--call it level 3 if you want. I'd just rather not be forced to sell when market conditions are unfavorable.

Kevin
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