Vanguard Prime Money Market yield over 2.5%

[grayfox]

Vanguard Prime Money Market SEC yield now is 2.48%, which is a compound yield of 2.51%. The compound yield is what you'd use to compare to the APY (annual percentage yield) of a bank account, which is why the post title says the yield is over 2.5%.

Although money market funds aren't FDIC insured, I'd be quite comfortable holding my savings in Prime MM instead of a bank savings account with a APY of less than 2.5%.

Kevin

2.5% looks better than most of the Treasury rates. You would have to go out 7-10 years to get another 10 to 20 basis points.

Code: Select all

Date		1 Mo	2 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
02/01/19	2.41	2.42	2.40	2.46	2.56	2.52	2.50	2.51	2.59	2.70	2.88	3.03

But unfortunately at this time, it looks like 2.5% is about as high as we'll get from Prime MMF in 2019. The rest of the FOMC meetings this year are close to 100% predicting to stay at Fed Funds Rate = 2.25 to 2.50

Fed Rate Monitor Tool
CME FedWatch Tool

I switched everything to VMMXX on 2.15.2018, its SEC Yield rose just as expected, and everything worked out as planned. In fact, better than planned. So I guess I'll stick with Prime MMF for now, but at some time it would make sense to lock in higher rates, if they become available.

[UpperNwGuy]

But unfortunately at this time, it looks like 2.5% is about as high as we'll get from Prime MMF in 2019. The rest of the FOMC meetings this year are close to 100% predicting to stay at Fed Funds Rate = 2.25 to 2.50

Why is that unfortunate? If the Fed were to raise rates, stocks would tumble, and most of us who own Vanguard Prime Money Market Fund also own stocks. Don't lose sight of the big picture.

[pdavi21]

But unfortunately at this time, it looks like 2.5% is about as high as we'll get from Prime MMF in 2019. The rest of the FOMC meetings this year are close to 100% predicting to stay at Fed Funds Rate = 2.25 to 2.50

Why is that unfortunate? If the Fed were to raise rates, stocks would tumble, and most of us who own Vanguard Prime Money Market Fund also own stocks. Don't lose sight of the big picture.

If the economy continues to strengthen, they could probably squeeze one or two into 2019 without causing much concern. They did four in 2018 and forecast three in 2019 until the market threw a tantrum.

[knpstr]

VFIAX yield at 2.19% as well.

[BL]

I see the PenFed 1-yr certificate has dropped from 2.80 to 2.60 APY yield, so perhaps that is a sign of the times. 15-month is 2.70%.

[Scooter57]

NASA FCU just raised its rates on 15, 25, and 49 mo Certificates. You need to add $10k new money to rollover a maturing CD.

[LocusCoeruleus]

How does the formula change for prime MM, if your state allows you to deduct the federal component even if it is < 50% threshold (i.e. you do not reside in the 3 states specifically listed):

Prime: TEY = Yt * (1-f) / (1 - f - (s * (1-usg%)))

Where usg = US GO + US T-Bills
As of 12/31/2018 usg = 3.9% + 31.9% for vg prime mm.

Does that look right to anyone? Also anyone know the tax implication (if any) with respect to foreign tax credit of the yankee/foreign component of prime mm?

[wwhan]

I see the PenFed 1-yr certificate has dropped from 2.80 to 2.60 APY yield, so perhaps that is a sign of the times. 15-month is 2.70%.

Also, PenFed 5-yr CD certificate has dropped from 3.50 to 3.15 APY yield. Glad I bought CDs in Dec/Jan at 3.5%.

[wwhan]

But unfortunately at this time, it looks like 2.5% is about as high as we'll get from Prime MMF in 2019. The rest of the FOMC meetings this year are close to 100% predicting to stay at Fed Funds Rate = 2.25 to 2.50

Why is that unfortunate? If the Fed were to raise rates, stocks would tumble, and most of us who own Vanguard Prime Money Market Fund also own stocks. Don't lose sight of the big picture.

I would buy more VTSAX, if the stock market really dropped a bunch.

[UpperNwGuy]

But unfortunately at this time, it looks like 2.5% is about as high as we'll get from Prime MMF in 2019. The rest of the FOMC meetings this year are close to 100% predicting to stay at Fed Funds Rate = 2.25 to 2.50

Why is that unfortunate? If the Fed were to raise rates, stocks would tumble, and most of us who own Vanguard Prime Money Market Fund also own stocks. Don't lose sight of the big picture.

I would buy more VTSAX, if the stock market really dropped a bunch.

There's a lot of that kind of talk around here. People claim to like market downturns so they can TLH or load up on recent poor performers while they are cheap. Frankly, I see that as making the best of a bad situation. I'll take rising stock prices over falling stock prices any day of the week.

[Kevin M]

How does the formula change for prime MM, if your state allows you to deduct the federal component even if it is < 50% threshold (i.e. you do not reside in the 3 states specifically listed):

Prime: TEY = Yt * (1-f) / (1 - f - (s * (1-usg%)))

Where usg = US GO + US T-Bills

I essentially answered this in this post, viewtopic.php?f=10&t=271396&p=4354009#p4354009, in which I showed the formula for Federal Money Market, which is about 78% US government securities. However, looking at your formula got me thinking about it, and I realized that the factor I originally showed for Fed MM was wrong, so I derived the correct factor, and updated that post.

The TEY factor for a fund for which some, but not all, holdings are in Treasuries or other US government securities that are exempt from state tax is:

= (1-f-(1-g)*s) / (1-f-s)

which can also be written as:

= (1-f-s+g*s) / (1-f-s)

So writing out the formula:

TEYg = Yg * (1-f-(1-g)*s) / (1-f-s) = Yg * (1-f-s+g*s) / (1-f-s)

Where Yg is the yield of the fund with partial US government holdings, f and s are the marginal federal and state tax rates respectively, and g is the percentage of holdings in Treasuries and other US government securities that are exempt from state income tax.

I've provided two versions of the formula/factor--use whichever you find more convenient. I included the derivation of the formula/factor in the linked post.

As of 12/31/2018 usg = 3.9% + 31.9% for vg prime mm.

As of 12/31/2018, Vanguard shows 28.23% of income from US government holdings, and 36.74% of assets in US government holdings. This is from their annual publication in which they show the breakdowns of income from and assets in US government holdings for all of their mutual funds. Here is what Vanguard says about the two columns of numbers:

• Column 1. Percentage of the fund’s total income derived from U.S. government obligations in 2018.
Check with your state or local tax office or with your tax advisor to determine whether your state allows you
to exclude some or all of the income you earn from mutual funds that invest in U.S. government obligations.
If your state allows an exclusion, refer to this column for the percentage of income that may be excluded for
each fund in which you’re invested.**

• Column 2. Percentage of the fund’s assets invested in U.S. government obligations as of December 31, 2018.
Certain states and municipalities require residents to pay intangible or personal property tax. If you’re required to pay either of these taxes, refer to this column for the percentage that may be excluded from these taxes for each fund in which you’re invested.

As I mentioned in the linked post on the factor for Federal MM fund, we don't know what the numbers will be for 2019, but I am using the numbers for 2018 as a guideline in my decision making.

Kevin

[Kevin M]

Here is the link to the Vanguard U.S. government obligations information PDF file, which has the breakdown of 2018 income from and percent of assets in US government obligations as of 12/31/2018, for use in preparation of 2018 income tax returns.

Here is a link to the version for financial advisors (includes institutional share classes of some funds):
https://advisors.vanguard.com/iwe/pdf/F ... 012019.pdf

Kevin

[Almost there]

All this is very interesting to read, however, when I need cash, I will either transfer funds from one of my cash accounts or Roth IRA. Either way, it'll take 2 days to be deposited into my checking account, the same as from Money Market. Am I the only one who has very little cash ($3,500) on hand?

[Kevin M]

All this is very interesting to read, however, when I need cash, I will either transfer funds from one of my cash accounts or Roth IRA. Either way, it'll take 2 days to be deposited into my checking account, the same as from Money Market. Am I the only one who has very little cash ($3,500) on hand?

I view Prime MM (and Treasury MM and Federal MM) basically as cash accounts. When cash is yielding 2.5%, which is about the same as a 5-year Treasury, why not keep more in cash?

Kevin

[yeahman]

I view Prime MM (and Treasury MM and Federal MM) basically as cash accounts. When cash is yielding 2.5%, which is about the same as a 5-year Treasury, why not keep more in cash?

Because it might not be 2.5% for long.

[Mnguyendc]

If my AA has 10% bond in the Total vanguard Bond market, would it be better to substitute my bond allocation for the Prime money market considering the yield?

[Doc]

I view Prime MM (and Treasury MM and Federal MM) basically as cash accounts. When cash is yielding 2.5%, which is about the same as a 5-year Treasury, why not keep more in cash?

Because in a flight to quality situation the five year Treasury price will increase but the MM fund will not. So it depends on what that "cash" is intended to be used for.

[azanon]

I wonder if we have a recession on the horizon. The G fund is only 2.625% (for February 2019), dropping steadily from 3.125% since November 2018, and is based on the average yield of all U.S. Treasury securities with 4 or more years to maturity. Source: https://www.tspfolio.com/tspgfundinterestrate

That's darn near a flat yield curve, right?

I might make out like a bandit with my Zero-coupon Treasuries in my Dalio/Robbins portfolio

[retiringwhen]

I stand corrected. I thought no state could tax U.S. Government interest income. I guess there must be a rule for U.S. interest income from mutual funds for CA, CT & NY.

I knew there would be a future reason for me to move from CT 40 years ago.

bill

No state can tax US Government interest income. The situation is here that you aren't receiving US Government interest income, but dividends from Vanguard's Prime Money Market fund. A state can choose to treat US Government interest received by a mutual fund and paid as part of its dividend as if the dividend recipient is receiving it directly, but is not obligated to do so.

This was litigated in NJ in the 1990s and the NJ Supreme Court read the US law as requiring NJ to not tax the income derived from the USGO. So, NJ dropped a 75% rule that existed before then. Sadly for other states, the NJ Supreme Court ruling has no legal value for the other states.

[retiringwhen]

I wonder if we have a recession on the horizon. The G fund is only 2.625% (for February 2019), dropping steadily from 3.125% since November 2018, and is based on the average yield of all U.S. Treasury securities with 4 or more years to maturity. Source: https://www.tspfolio.com/tspgfundinterestrate

That's darn near a flat yield curve, right?

Or inflation fears have eased.

[Kevin M]

I view Prime MM (and Treasury MM and Federal MM) basically as cash accounts. When cash is yielding 2.5%, which is about the same as a 5-year Treasury, why not keep more in cash?

Because it might not be 2.5% for long.

Because in a flight to quality situation the five year Treasury price will increase but the MM fund will not. So it depends on what that "cash" is intended to be used for.

These are both good answers.

The first addresses the tradeoff between price risk (aka, interest rate risk) and reinvestment risk, which I think can both be considered elements of term risk (risk related to term to maturity). The second addresses the function of the fixed income in the portfolio.

A retail money market fund has no price risk, since the share price is maintained at $1.00, even though there is some fluctuation of the value of the fund's holdings (daily market share price has fluctuated between $1.000 $1.0000 and $1.003 $1.0003 over the last six months, with an average of $1.001 $1.0001). (Edited to correct share price min, max and average).

Reinvestment risk is the uncertainty of the yield when the maturing proceeds are reinvested. With a MM fund, the proceeds are essentially reinvested daily from the investor's perspective, since interest accrues daily. The percentage of Prime MM holdings maturing in one day or less generally is more than 25%, averaging 28% over the last six months, with a minimum of 19% and maximum of 35%. Prime MM yield is highly correlated with the federal funds rate (FFR), so the yield of Prime MM depends mostly on the FFR, and of course that could change at the next FOMC meeting.

Future target rate for the FFR depends on future economic conditions, which no one can predict, so there is fairly high uncertainty in Prime MM yield over a period of more than a few months, and certainly over longer periods than that. Thus, the reinvestment risk of Prime MM is higher than fixed income with longer terms to maturity.

No price risk and high reinvestment risk is typical of fixed income with 0-year term to maturity, so from the investor's perspective, Prime MM has a 0-year term to maturity, although the average maturity of the fund's holdings was 39.0 days as of 1/31/2019.

All holding details are available here: https://investor.vanguard.com/mutual-fu ... olio/vmmxx.

As Doc points out, if you want some fixed income that is likely to increase in value in a flight-to-quality scenario, as we saw big time in late 2008, then longer-term Treasuries are your friend (and the longer term, the better for this purpose). This can be particularly useful if your investment policy includes rebalancing from fixed income into stocks, and your rebalancing is triggered by whatever causes the flight to safety scenario; e.g., a big enough drop in stock prices. Such a scenario is where the price risk can pay off (investment risk has an upside as well as a downside), but of course there are other scenarios where the price risk can show up big time, such as extended periods of rising rates and unexpected inflation (the latter is relevant if we think in terms of real price risk as opposed to nominal price risk).

Kevin

[robertmcd]

I wonder if we have a recession on the horizon. The G fund is only 2.625% (for February 2019), dropping steadily from 3.125% since November 2018, and is based on the average yield of all U.S. Treasury securities with 4 or more years to maturity. Source: https://www.tspfolio.com/tspgfundinterestrate

That's darn near a flat yield curve, right?

Or inflation fears have eased.

There is a higher chance that we are at 2.0-2.25 in Dec 2019 than 2.5-2.75. The Fed hit the breaking point, and they had to back off. Next to go will be QT. Then when that doesn't work we will back to 0% rates and QE.

Treasury bonds are not the steal they were back in Nov when the 2 yr hit 2.98 and the 30 yr hit 3.46, but they are still a good deal to hedge your stock exposure. Short, intermediate, or long term, depending on your equity percentage.

[Doc]

As Doc points out, if you want some fixed income that is likely to increase in value in a flight-to-quality scenario, as we saw big time in late 2008, then longer-term Treasuries are your friend (and the longer term, the better for this purpose).

From the bear perspective the longer term is arguably better but this is at the expense of interest rate risk if the bear never shows up. Short term Treasuries may be a good compromise.

Kevin, as another wrinkle would you comment on an ultra short funds like Vanguard Ultra-Short-Term Bond Investor VUBFX as another alternative? Current 30 day SEC yield of 2.73% with a price range of 9.95 to 10.02 over the last ten years

[robertmcd]

As Doc points out, if you want some fixed income that is likely to increase in value in a flight-to-quality scenario, as we saw big time in late 2008, then longer-term Treasuries are your friend (and the longer term, the better for this purpose).

From the bear perspective the longer term is arguably better but this is at the expense of interest rate risk if the bear never shows up. Short term Treasuries may be a good compromise.

Kevin, as another wrinkle would you comment on an ultra short funds like Vanguard Ultra-Short-Term Bond Investor VUBFX as another alternative? Current 30 day SEC yield of 2.73% with a price range of 9.95 to 10.02 over the last ten years

I like this fund, but I may even prefer ICSH to it.

[retiringwhen]

As Doc points out, if you want some fixed income that is likely to increase in value in a flight-to-quality scenario, as we saw big time in late 2008, then longer-term Treasuries are your friend (and the longer term, the better for this purpose).

From the bear perspective the longer term is arguably better but this is at the expense of interest rate risk if the bear never shows up. Short term Treasuries may be a good compromise.

Kevin, as another wrinkle would you comment on an ultra short funds like Vanguard Ultra-Short-Term Bond Investor VUBFX as another alternative? Current 30 day SEC yield of 2.73% with a price range of 9.95 to 10.02 over the last ten years

I like this fund, but I may even prefer ICSH to it.

We used VUBFX to hold funds for a 14 month period that was well defined and where asset protection was a high priority. We are winding it down this month and my quick look a week or two ago showed that we got a may 20bp better yield from VUBFX vs. VMMMX.

[Kevin M]

Reinvestment risk is the uncertainty of the yield when the maturing proceeds are reinvested. With a MM fund, the proceeds are essentially reinvested daily from the investor's perspective, since interest accrues daily.

The increase in MM yields had already begun to taper in recent weeks, and yesterday the SEC yield of Prime MM actually fell by one basis point to 2.47% (Compound yield = 2.50%). Since SEC yield is a trailing 7-day average, the actual yield today may be a bit lower (just as when it was rising the actual yield could have been a bit higher).

Yield of Treasury MM did not fall yesterday, but held steady as 2.32% (TEY for me of 2.61%).

Kevin

[Doc]

I like this fund, but I may even prefer ICSH to it.

We used VUBFX to hold funds for a 14 month period that was well defined and where asset protection was a high priority. We are winding it down this month and my quick look a week or two ago showed that we got a may 20bp better yield from VUBFX vs. VMMMX.

The increase in MM yields had already begun to taper in recent weeks, and yesterday the SEC yield of Prime MM actually fell by one basis point to 2.47% (Compound yield = 2.50%). Since SEC yield is a trailing 7-day average, the actual yield today may be a bit lower (just as when it was rising the actual yield could have been a bit higher).

Looking at very short term data like a 7-day or 30 day SEC yield is not very appealing to me. But with interest rates changing as the Fed activity gyrates means longer term rates aren't very good either.

Try a 90 day moving average.



And I am always skeptical if that 90 day average includes December of any year.

[BogleMelon]

what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?

The main disadvantage is no FDIC insurance on MM funds, but as I said, I think that's not much of a consideration in the current economic environment. If things started to deteriorate, I'd rethink that. A related issue is that withdrawals can be restricted if the MM fund gets into trouble; I don't believe that's the case for Federal MM fund, and perhaps not for Treasury MM fund, but I'm not worried about that now.

Another disadvantage is that you can't transfer money out of Vanguard for 7 days after transferring it in, so you have to keep this in mind.

However, this doesn't seem to apply if you have a margin account. I tested this by transferring $50K into a new Treasury MM fund in my Vanguard Advantage brokerage account, which is a margin account (I already had Treasury MM in my old-platform mutual fund account, but I wanted to see if it worked differently in the brokerage account). The next day I sold $20 of Treasury MM, which went into Federal MM settlement fund, and I also entered an order at Schwab to buy $20 of a money market fund there, specifying my Vanguard Advantage account as the source of the funds. Money came out of the VG Federal MM fund the next day. I have not been charged any margin interest, so even though my account still shows a hold on $50K, it's effectively not being enforced.

One advantage is that you don't have the limit of 6 outgoing transactions per month, as you have on a bank savings account.

I'm finding that the transactions either to or from Ally from or to Vanguard happen same day, but if initiated at Ally, must be scheduled the day before; i.e., the money leaves one account and arrives in the other on the same day. If I do the buy on the Vanguard side before market closes, money comes out of Ally the next day, but as far as I can tell, interest starts accruing in the MM fund on the day of the transaction. This is different than in the old-platform mutual fund account, in which interest does not start accruing until the next trading day.

At least this is what I'm seeing by looking at the Balances by date for each successive day.

Kevin

but if initiated at Ally,

How to initiate at Ally to Vanguard brokerage MM fund?!

[Kevin M]

As Doc points out, if you want some fixed income that is likely to increase in value in a flight-to-quality scenario, as we saw big time in late 2008, then longer-term Treasuries are your friend (and the longer term, the better for this purpose).

From the bear perspective the longer term is arguably better but this is at the expense of interest rate risk if the bear never shows up. Short term Treasuries may be a good compromise.

The Treasury price increase in late 2008 was proportional to the term to maturity. The Nov 2008 monthly returns for VG Treasury money market, short-term, intermediate-term and long-term Treasury funds were 0.11%, 1.03%, 5.59%, 12.08% respectively, and for Dec 2008 they were 0.08%, 1.17%, 3.67%, and 8.88%. You got a little extra bang for the buck by going from MM to short-term, but you got a lot for going long term.

I agree that you need to weigh the potential flight-to-safety benefit against the higher term risk. You also have to actually rebalance into stocks at the right time to get the benefit, unless the benefit to you is just not seeing your portfolio value go down so much temporarily (assuming you believe that stocks will eventually recover, which most people seem to, and you are not particularly sensitive to sequence of returns risk).

Kevin, as another wrinkle would you comment on an ultra short funds like Vanguard Ultra-Short-Term Bond Investor VUBFX as another alternative? Current 30 day SEC yield of 2.73% with a price range of 9.95 to 10.02 over the last ten years

Inception date was 2/24/2015, so we don't have actual history for 10 years.

As I recall, at least some ultra-short-term bond funds got slaughtered in 2008. I recall owning some shares of one, but dumped them as soon as the price dropped more than I expected for an ultra-short-term bond fund, so luckily avoided most of the massacre. Ever since, I have not even looked at them.

Looking now, I see 42% in asset-backed securities, and only 1.5% in US Government, but 40% in AAA. Of course a lot of the asset/mortgage-backed securities that tanked in 2008 were rated AAA--at least that's my understanding.

With a yield that's in the ballpark of the 10-year Treasury, and an average duration of 0.9 years, it appears that you are getting compensated for taking credit risk.

Data for VUBFX: https://investor.vanguard.com/mutual-fu ... view/vubfx

Kevin

[bligh]

I see the PenFed 1-yr certificate has dropped from 2.80 to 2.60 APY yield, so perhaps that is a sign of the times. 15-month is 2.70%.

Marcus still has 12 month CDs for 2.75% APY. I haven't pulled the trigger on those but it is on my radar.

[aspiringboglehead]

A retail money market fund has no price risk, since the share price is maintained at $1.00, even though there is some fluctuation of the value of the fund's holdings (daily market share price has fluctuated between $1.000 and $1.003 over the last six months, with an average of $1.001).

First, just in general, thanks for all the information you've provided over the years about fixed-income funds, money markets, and CDs; I've found it extremely valuable.

Second, just a quick correction here, in case anyone's paying attention to the literally tiny details: The range of price movement in the money-market funds is actually an order of magnitude smaller (for example, the recent range of VMMXX has been between $1.0000 and $1.0003).

[Doc]

Inception date was 2/24/2015, so we don't have actual history for 10 years.

My bad. I hit the ten year "button" and didn't look at the actual dates. But I also looked at one year and got virtually the same result at least qualitatively.

As I recall, at least some ultra-short-term bond funds got slaughtered in 2008.

Schwab's did. They had touted it as a MM like investment but it had very high credit risk. They abandoned the fund and maybe even got sued. (I may even have gotten a small settlement.) I got rid of it in February 2007. Now if I could only pick the winners that well.

-----

I only use short and intermediate nominal Treasuries as my bear killers. I do not buy long bonds per Swdroe's "The Only Guide To a Winning Bond Strategy ..." If I had a very high AA, say 80+ I would probably go with long Treasuries if we were in a more normal bond market.

[Kevin M]

what disadvantages are there to switching from capital one at 2.0% to VMMXX for my emergency fund?

<snip>
However, this doesn't seem to apply if you have a margin account. I tested this by transferring $50K into a new Treasury MM fund in my Vanguard Advantage brokerage account, which is a margin account (I already had Treasury MM in my old-platform mutual fund account, but I wanted to see if it worked differently in the brokerage account).

but if initiated at Ally,

How to initiate at Ally to Vanguard brokerage MM fund?!

Note underlined "Vanguard Advantage". A Vanguard Advantage brokerage account functions like a checking account. You get checks, and the routing and account numbers can be used to set the account up as an external checking account at Ally or other financial institutions.

You may also be able to get checks for individual money market or bond funds, but I don't recall ever doing that. So maybe another way would be to set up checking on the MM fund, but I don't know if you can set up ACH transfers into the funds using the routing and account numbers on those checks--maybe someone else can let us know. Also, I believe there is a $250 minimum for check writing.

Looking at my accounts, I only see the option to set up checkwriting on non-settlement-fund money market and bond funds in my mutual fund accounts; i.e, accounts that are still on the old platform, and only hold mutual funds (no brokerage products). For brokerage accounts, it appears that you can set up checkwriting on the Federal MM settlement fund.

I'm calling Vanguard now to ask about setting up checkwriting on the Treasury MM fund in my mutual fund account ... OK, Vanguard rep tells me that you cannot use the routing and account numbers for a fund with checkwriting to set up ACH transfers to or from external financial institutions. A Vanguard Advantage (VA) account is the only way you can do this.

With a VA account, the Federal MM settlement fund functions as the checking account. I thought I included the details, but in case I left it out, when I pushed the money into the VA account from the external bank (in this case, not Ally, but it works the same), it showed up in my VA Federal MM settlement fund on the same day it left the bank account. On that same day I bought shares of Treasury MM with the proceeds transferred into Federal MM (in this particular case, the Treasury MM fund was in my mutual fund account).

As a side note, from what I can tell, MM funds in a brokerage account start accruing interest on purchases on the trade date, while in a mutual fund account interest accrual starts on T+1 (the next trading day after the trade date).

Kevin

[Kevin M]

A retail money market fund has no price risk, since the share price is maintained at $1.00, even though there is some fluctuation of the value of the fund's holdings (daily market share price has fluctuated between $1.000 and $1.003 over the last six months, with an average of $1.001).

First, just in general, thanks for all the information you've provided over the years about fixed-income funds, money markets, and CDs; I've found it extremely valuable.

Second, just a quick correction here, in case anyone's paying attention to the literally tiny details: The range of price movement in the money-market funds is actually an order of magnitude smaller (for example, the recent range of VMMXX has been between $1.0000 and $1.0003).

Thanks for the kind words, and thanks for posting in general!

Thanks for the correction. You're right of course--I just rechecked: 1.0000 to 1.0003 from 8/8/2018 through 2/4/2019, with average 1.0001.

Kevin

[Kevin M]

I see the PenFed 1-yr certificate has dropped from 2.80 to 2.60 APY yield, so perhaps that is a sign of the times. 15-month is 2.70%.

Marcus still has 12 month CDs for 2.75% APY. I haven't pulled the trigger on those but it is on my radar.

At Schwab now I see 11.7-month Treasury at TEY for me of 2.86%, and 6-month at TEY of 2.80%.

Kevin

[yeahman]

This was litigated in NJ in the 1990s and the NJ Supreme Court read the US law as requiring NJ to not tax the income derived from the USGO. So, NJ dropped a 75% rule that existed before then. Sadly for other states, the NJ Supreme Court ruling has no legal value for the other states.

Doesn't NJ currently have a 80% rule?

[Jake Hogan]

Can you help me with the TEY calculation. I currently have my cash parked in VMSXX (Vanguard Municipal Money Market) 1.42% SEC 7 day and was wondering if it should be parked in VMMXX?
My Fed Bracket is 37
My State Bracket is 4.25
I am subject to NIIT 3.8

Thanks for your help.

[saver007]

BTW, for those with IBKR accounts, owning ICSH while signed up to IB's security lending program is a good deal.

For some reason, ICSH get lend out pretty consistently month to month on certain days.
It earned me about 65 basis point annualized distributed yield last month from lending. That's on top of the 2.63 % distributed yield directly from ICSH..so total of 3.28% distributed yield for holding ICSH last month. ICSH SEC yield is 2.93% now.

[nolesrule]

This was litigated in NJ in the 1990s and the NJ Supreme Court read the US law as requiring NJ to not tax the income derived from the USGO. So, NJ dropped a 75% rule that existed before then. Sadly for other states, the NJ Supreme Court ruling has no legal value for the other states.

Doesn't NJ currently have a 80% rule?

The NJ 80% rule is for "Qualified Investment Funds" and is determined by the percentage of assets in a fund that are federal government obligations. This rule is for exempting capital gains income.

Interest derived from federal government obligations is always exempt as retiredwhen points out. So just apply the percentage of USGO against the dividends and interest received from that fund to get the amount exempt from state taxes.

[deskjockey]

Can you help me with the TEY calculation. I currently have my cash parked in VMSXX (Vanguard Municipal Money Market) 1.42% SEC 7 day and was wondering if it should be parked in VMMXX?
My Fed Bracket is 37
My State Bracket is 4.25
I am subject to NIIT 3.8

Thanks for your help.

Does your state allow you to deduct any interest earned from US Government obligations, or is it like California where more than 50% or more of the holdings have to be US obligations? That will impact the VMMXX's TEY. If it does allow a deduction, VMMXX's TEY is 2.51%, compared with 2.47% for VMSXX. If no deduction is allowed, the rates are essentially identical right now.

[anoop]

How does Vanguard manage this? I don't see anything close at Fidelity, not even their funds that require a $1M+ minimum investment.

[Chuck]

How does Vanguard manage this? I don't see anything close at Fidelity, not even their funds that require a $1M+ minimum investment.

1-month treasurys are 2.4%. The expense ratio is 0.16%. This is not hard to achieve at all. It's actually more amazing how much other fund companies suck at this.

[retiringwhen]

How does Vanguard manage this? I don't see anything close at Fidelity, not even their funds that require a $1M+ minimum investment.

This is what you get when the company is run for its customers who are also owners....

Fidelity has to find pennies somewhere to pay their shareholders. A major, possibly largest, place they find those pennies is in high cost (read ER) money market funds. It is true across the industry.

If someone holds significant cash in money markets, there is really no reason to go anywhere but Vanguard.

BTW, my previous research showed that in general Fidelity is more attractive to customers than most other brokerage houses for money markets.

[anoop]

This is what you get when the company is run for its customers who are also owners....

Fidelity has to find pennies somewhere to pay their shareholders. A major, possibly largest, place they find those pennies is in high cost (read ER) money market funds. It is true across the industry.

If someone holds significant cash in money markets, there is really no reason to go anywhere but Vanguard.

BTW, my previous research showed that in general Fidelity is more attractive to customers than most other brokerage houses for money markets.

If I look at something like SPAXX, it barely equals VMMXX in return when the ER is 0.

[retiringwhen]

This is what you get when the company is run for its customers who are also owners....

Fidelity has to find pennies somewhere to pay their shareholders. A major, possibly largest, place they find those pennies is in high cost (read ER) money market funds. It is true across the industry.

If someone holds significant cash in money markets, there is really no reason to go anywhere but Vanguard.

BTW, my previous research showed that in general Fidelity is more attractive to customers than most other brokerage houses for money markets.

If I look at something like SPAXX, it barely equals VMMXX in return when the ER is 0.

Yes, btw, Vanguard has one of the best teams managing their cash funds too so they win on cost AND execution.

EDIT: but in this case you should not compare SPAXX to VMMXX, they are not comparable funds. VMFXX (Federal Money Market is a better comparison to SPAXX)

[Doc]

EDIT: but in this case you should not compare SPAXX to VMMXX, they are not comparable funds. VMFXX (Federal Money Market is a better comparison to SPAXX)

Without looking to hard about their portfolios:



Vanguard Ultra-Short-Term Bond Fund Investor Shares VUBFX
Fidelity® Money Market Fund Retail SPRXX
Schwab Value Advantage Investor SWVXX
Vanguard Prime MM Investor VMMXX

Not that much difference guys (except of course for the ultra short fund)

[anoop]

Yes, btw, Vanguard has one of the best teams managing their cash funds too so they win on cost AND execution.

EDIT: but in this case you should not compare SPAXX to VMMXX, they are not comparable funds. VMFXX (Federal Money Market is a better comparison to SPAXX)

Does Fidelity have anything comparable to VMMXX?

Also, I was surprised to find that the interest from SPAXX was subject to state income tax. I thought being a government MM fund, the interest would be reported as being not subject to state tax, but that does not appear to be the case.

[arf30]

Does Fidelity have anything comparable to VMMXX?

VMMXX - roughly comparable to SPRXX, Prime MM - holds commercial paper, yankee bonds, CDs, etc. Subject to redemption gates, liquidity fees, etc

VMFXX/VUSXX - comparable to SPAXX/FDRXX/FDLXX - hold government bonds, treasuries, repurchase agreements. Exempt from redemption gates and restrictions, etc. May be partially/fully state tax exempt depending on state.

[Kevin M]

Without looking to hard about their portfolios:



Vanguard Ultra-Short-Term Bond Fund Investor Shares VUBFX
Fidelity® Money Market Fund Retail SPRXX
Schwab Value Advantage Investor SWVXX
Vanguard Prime MM Investor VMMXX

Not that much difference guys (except of course for the ultra short fund)

It may not be a big deal, but I definitely prefer making 16-20 basis points of extra yield or 1-year return if it's easy to do. Since I already have taxable accounts at Schwab, Fidelity and Vanguard, I'm going to use Vanguard's money market funds, unless the competition offers me something that's worth the lower yield.

For example, some might prefer Fidelity because of the CMA and ability to set up overdraft for the CMA from a money market fund. In my case, with a (free) Vanguard Advantage account, I'm finding that I can use the Fed MM fund as a high-yield checking account (TEY = 2.54%) and Treasury MM as a "linked" high-yield savings account (TEY = 2.61%). VG doesn't have the overdraft thing, and won't pull from non-settlement-fund MMs to cover cash debits, so I have to manually transfer from Treasury MM to Fed MM to cover anticipated debits, but that's easy enough to do.

Relevant to one of your earlier posts as well as this post, past returns are backward looking, so aren't very useful with respect to estimating expected returns.

The 1-year VMMXX return of 2.04% is irrelevant with respect to what I'm going to earn from the fund tomorrow; I know I'll earn about 2.5%, since that's what the yield is. What I earn over the next year has much more to do with what the Fed does with the FFR, and the relevant credit spreads of VMMXX holdings, than what VMMXX earned over the last year.

The 1-year return of VUBFX has a lot more to do with what happens with the 1-year Treasury rate and the spread of 1-year AA corporates over 1-year Treasuries over the next year than what it earned over the last year. The SEC yield is 2.73% with an ER of 0.20%, so call it 2.93% before ER. Yield of 1-year AA corporate is 2.84% (quotes from Fidelity's Yields web page), so maybe the fund average rating is a little less than AA, or maybe the 30-day lagging average yield (SEC yield) is a bit lower than today's yield, or maybe the yield Fidelity is showing is for something that the market judges to be of lower quality than competing AA corporates (the Yields page shows the highest yield).

Looking at the 1-year return of the Schwab ultra-short bond fund before it tanked in 2008 probably made it look good compared to money market funds too. Sometimes you are rewarded for credit risk, and sometimes the risk shows up.

Kevin

[Kevin M]

Can you help me with the TEY calculation. I currently have my cash parked in VMSXX (Vanguard Municipal Money Market) 1.42% SEC 7 day and was wondering if it should be parked in VMMXX?
My Fed Bracket is 37
My State Bracket is 4.25
I am subject to NIIT 3.8

Thanks for your help.

Does your state allow you to deduct any interest earned from US Government obligations, or is it like California where more than 50% or more of the holdings have to be US obligations? That will impact the VMMXX's TEY. If it does allow a deduction, VMMXX's TEY is 2.51%, compared with 2.47% for VMSXX. If no deduction is allowed, the rates are essentially identical right now.

Doing the calculation assuming no state tax exemption for VMMXX, just adding the NIIT to the Fed tax (it may be slightly more complicated than this), and assuming no state income tax deduction on Schedule A for marginal interest income (e.g., capped by SALT), I get the same result of 2.47% TEY for both.

However, I also get a TEY of 2.50% for Treasury MM fund (VUSXX), so that is slightly better if you have the $50K initial investment for the fund.

It's important to remember, though, that it's your marginal tax rates that matter, not your tax brackets, and there are many factors that can cause one to be different than the other.

Another thing to keep in mind is that the muni MM fund yields are cyclical. They are on an upswing now, and VMSXX TEY just caught up to Prime MM yield at your tax rates (with given assumptions). At the bottom of the most recent cycle on 1/22/2019, TEY of VMSXX was 2.27% compared to VUSXX TEY of 2.49% and Prime yield of 2.47%. However, looking at the last year or so, VMSXX TEY for you spent a lot more time above the other MM funds than below them, so if you want to stick with one fund, VMSXX probably is it. The chart below shows the TEYs for your tax rates (with all the caveats mentioned) since 1/1/2018.



Kevin