Vanguard Prime Money Market yield over 2.5%

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Riley15
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Riley15 » Thu Feb 07, 2019 5:05 pm

Kevin M wrote:
Thu Feb 07, 2019 4:35 pm

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

Can you share what the Ticker of the this Ultra-short term bond fund is? I am curious to see how is behaved compared to Total Bond in a period like 2008.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Feb 07, 2019 5:18 pm

Riley15 wrote:
Thu Feb 07, 2019 5:05 pm
Kevin M wrote:
Thu Feb 07, 2019 4:35 pm

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
Can you share what the Ticker of the this Ultra-short term bond fund is? I am curious to see how is behaved compared to Total Bond in a period like 2008.
Do a web search on: schwab ultra short bond fund 2007

I'm reviewing now ...

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Feb 07, 2019 5:29 pm

Kevin M wrote:
Thu Feb 07, 2019 5:18 pm
Riley15 wrote:
Thu Feb 07, 2019 5:05 pm
Kevin M wrote:
Thu Feb 07, 2019 4:35 pm

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
Can you share what the Ticker of the this Ultra-short term bond fund is? I am curious to see how is behaved compared to Total Bond in a period like 2008.
Do a web search on: schwab ultra short bond fund 2007

I'm reviewing now ...

Kevin
Interesting article: Schwab YieldPlus Fund Was NOT An Ultra Short-Term Bond Fund. I'm pretty sure that this is the one that Doc and I owned, and both got out of before it got too bad (as I recall, I got out after losing about 1%).

And another: Fund Times: Schwab Bond Fund Suffers Mass Exodus, published on 3/27/2008.

Ticker was SWYPX. As Doc said, I think the fund was discontinued, so don't know if you can find performance history. M* has nothing except articles when I search on the ticker.

Here's a more recent article from M* on 9/3/2008, but looks like you can only read the first bit without a membership: Ultrashort-Term Bond Funds Suffer Massive Blow. From the bit I can see without logging in:
The ultrashort-term bond category has taken a massive blow, and recovery for many of the hardest-hit funds falls somewhere in the range of doubtful to impossible. In a category where only a few basis points tended to separate the leaders from the laggards and losses had been small, the category's worst performers have lost between 10% and 30% over the past year. That, from funds sold as a cash alternative, is downright astounding. Unfortunately, the worst returns have come from some prominent fund families and funds with the most assets, including Fidelity Ultra-Short Bond FUSFX and Schwab YieldPlus SWYPX.

We can't say that we saw this coming. We didn't. There were risks in these portfolios that were hard to see and had never materialized in the past, so backward-looking risk measures such as standard deviation and past losses proved unreliable. Given the near-term maturities of the bonds in the portfolio, we underestimated the damage that subprime and other low-quality bonds could cause. A few other things stood in the way of careful analysis, too. Many of these security types did not have long histories. The mortgage-backed securities market didn't take off until the 1980s, for example, and it has never hit times like this. The credit ratings agencies also failed. The other risk that started feeding on itself was the effect of shareholder redemptions: The unexpected extent of losses led fundholders to redeem their shares, which forced the managers to sell securities at deep discounts, which led to further losses, leading to further redemptions, and so on.
Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Riley15 » Thu Feb 07, 2019 5:49 pm

Kevin M wrote:
Thu Feb 07, 2019 5:29 pm
Kevin M wrote:
Thu Feb 07, 2019 5:18 pm
Riley15 wrote:
Thu Feb 07, 2019 5:05 pm
Kevin M wrote:
Thu Feb 07, 2019 4:35 pm

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
Can you share what the Ticker of the this Ultra-short term bond fund is? I am curious to see how is behaved compared to Total Bond in a period like 2008.
Do a web search on: schwab ultra short bond fund 2007

I'm reviewing now ...

Kevin
Interesting article: Schwab YieldPlus Fund Was NOT An Ultra Short-Term Bond Fund. I'm pretty sure that this is the one that Doc and I owned, and both got out of before it got too bad (as I recall, I got out after losing about 1%).

And another: Fund Times: Schwab Bond Fund Suffers Mass Exodus, published on 3/27/2008.

Ticker was SWYPX. As Doc said, I think the fund was discontinued, so don't know if you can find performance history. M* has nothing except articles when I search on the ticker.

Here's a more recent article from M* on 9/3/2008, but looks like you can only read the first bit without a membership: Ultrashort-Term Bond Funds Suffer Massive Blow. From the bit I can see without logging in:
The ultrashort-term bond category has taken a massive blow, and recovery for many of the hardest-hit funds falls somewhere in the range of doubtful to impossible. In a category where only a few basis points tended to separate the leaders from the laggards and losses had been small, the category's worst performers have lost between 10% and 30% over the past year. That, from funds sold as a cash alternative, is downright astounding. Unfortunately, the worst returns have come from some prominent fund families and funds with the most assets, including Fidelity Ultra-Short Bond FUSFX and Schwab YieldPlus SWYPX.

We can't say that we saw this coming. We didn't. There were risks in these portfolios that were hard to see and had never materialized in the past, so backward-looking risk measures such as standard deviation and past losses proved unreliable. Given the near-term maturities of the bonds in the portfolio, we underestimated the damage that subprime and other low-quality bonds could cause. A few other things stood in the way of careful analysis, too. Many of these security types did not have long histories. The mortgage-backed securities market didn't take off until the 1980s, for example, and it has never hit times like this. The credit ratings agencies also failed. The other risk that started feeding on itself was the effect of shareholder redemptions: The unexpected extent of losses led fundholders to redeem their shares, which forced the managers to sell securities at deep discounts, which led to further losses, leading to further redemptions, and so on.
Kevin

I read of similar things on a quick web search about the Schwab Yield Plus Fund. Obviously there was unethical practices going on when reporting the duration and risks of the fund. Seems like it was marketed as "high-yield" money market type fund.

Nevertheless, this is really scary!!
What's to say this can't happen again even at Vanguard?

Us as individual investors just have to go by what's listed on the fund page with regards to term and credit risks.
Who knows if there is a hidden footnote deep somewhere in the prospectus that it's much more risky than it appears. And generally people don't pay attention to credit risk if it's rated high-grade.

Does this mean we should avoid Active Bond funds and only to stick to Index Bond Funds?
Still doesn't seem foolproof.

If there is a liquidity crunch in a Bond Fund shouldn't they freeze liquidations until the panic goes away to avoid being wiped out.
I believe that's what happens in Money Market funds.
I don't think the original investors of the Schwab fund were made whole even after the legal actions.
Last edited by Riley15 on Fri Feb 08, 2019 1:52 pm, edited 3 times in total.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by hushpuppy » Thu Feb 07, 2019 5:51 pm

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Last edited by hushpuppy on Fri Feb 15, 2019 9:10 pm, edited 1 time in total.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Doc » Thu Feb 07, 2019 6:00 pm

Kevin M wrote:
Thu Feb 07, 2019 4:35 pm
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.
I don't use Money Market funds as anything but "dividend accumulators". It's not worth the effort to move a few $k from one broker to another for what may only be a month or two. If you are using it for an emergency fund with a year's or so expenses you might have a different point of view.
Kevin M wrote:
Thu Feb 07, 2019 4:35 pm
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 ...
Right but with MM funds I'm only going back 3 months for this particular exercise. And I'm not even choosing the "best" from that data. More like just looking at trending.
Kevin M wrote:
Thu Feb 07, 2019 4:35 pm
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.
I never thought of the Schwab ultra-short as a MM fund. It was obviously high risk. On the other hand I do lump Vg Ultra Short Term Bond (VUBFX) in with the "cash" funds.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Riley15 » Thu Feb 07, 2019 6:18 pm

Kevin M wrote:
Thu Feb 07, 2019 5:29 pm

I'm pretty sure that this is the one that Doc and I owned, and both got out of before it got too bad (as I recall, I got out after losing about 1%).

Kevin

Having been there what made you realize to sell when it was down 1% and go against the "stay the course" mantra?

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Re: Vanguard Prime Money Market yield over 2.5%

Post by SpaethCo » Thu Feb 07, 2019 7:25 pm

anoop wrote:
Thu Feb 07, 2019 2:00 pm
How does Vanguard manage this? I don't see anything close at Fidelity, not even their funds that require a $1M+ minimum investment.
FNSXX has a 2.58% compound yield right now. The fund minimum is $10m in a brokerage account, or if you have a structured retirement account the minimum is a mere $500.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by retiringwhen » Thu Feb 07, 2019 8:00 pm

SpaethCo wrote:
Thu Feb 07, 2019 7:25 pm
anoop wrote:
Thu Feb 07, 2019 2:00 pm
How does Vanguard manage this? I don't see anything close at Fidelity, not even their funds that require a $1M+ minimum investment.
FNSXX has a 2.58% compound yield right now. The fund minimum is $10m in a brokerage account, or if you have a structured retirement account the minimum is a mere $500.
what is a "structured retirement account"?

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Re: Vanguard Prime Money Market yield over 2.5%

Post by SpaethCo » Thu Feb 07, 2019 8:04 pm

retiringwhen wrote:
Thu Feb 07, 2019 8:00 pm
what is a "structured retirement account"?
It’s my poorly worded summarization of the following:
Initial minimum investments into group retirement accounts such as Fidelity Simplified Employee Pension-IRA, Keogh, Self-Employed 401(k), and Non-Fidelity Prototype Retirement accounts are $500 or higher. There is no minimum for additional investments in any type of Fidelity fund you already own.
In my case, BrokerageLink off my 401k at Fidelity works for access to this fund.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Doc » Thu Feb 07, 2019 8:05 pm

Riley15 wrote:
Thu Feb 07, 2019 6:18 pm
Kevin M wrote:
Thu Feb 07, 2019 5:29 pm

I'm pretty sure that this is the one that Doc and I owned, and both got out of before it got too bad (as I recall, I got out after losing about 1%).

Kevin

Having been there what made you realize to sell when it was down 1% and go against the "stay the course" mantra?
"Stay the course mantra" to me means sticking to your plan regardless of what the market is doing. I got into this fund knowing it was high risk for a puportedly MM fund. I got out before it crashed because I no longer had a need for that type of position. Not because the market made some kind of adverse move.

It had nothing to do with it being down. I don't think it even was down when I sold.

Kevin may have a different idea.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Feb 07, 2019 11:05 pm

Riley15 wrote:
Thu Feb 07, 2019 5:49 pm
Kevin M wrote:
Thu Feb 07, 2019 5:29 pm
<snip>
Here's a more recent article from M* on 9/3/2008, but looks like you can only read the first bit without a membership: Ultrashort-Term Bond Funds Suffer Massive Blow. From the bit I can see without logging in:
The ultrashort-term bond category has taken a massive blow, and recovery for many of the hardest-hit funds falls somewhere in the range of doubtful to impossible. <snip> the category's worst performers have lost between 10% and 30% over the past year. <snip> the worst returns have come from some prominent fund families and funds with the most assets, including Fidelity Ultra-Short Bond FUSFX and Schwab YieldPlus SWYPX.
<snip>Seems like it was marketed as "high-yield" money market type fund.
I snipped just the part of the quote from the article that emphasizes that the entire category of ultra-short term bonds did unexpectedly bad; it wasn't just the Schwab fund, although that one might have been one of the worst if not the worst.

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Feb 07, 2019 11:13 pm

Riley15 wrote:
Thu Feb 07, 2019 6:18 pm
Kevin M wrote:
Thu Feb 07, 2019 5:29 pm
I'm pretty sure that this is the one that Doc and I owned, and both got out of before it got too bad (as I recall, I got out after losing about 1%).

Kevin
Having been there what made you realize to sell when it was down 1% and go against the "stay the course" mantra?
I don't follow mantras. I try to think and understand, and to make decisions based on my best understanding. That's why I started switching from bond funds to direct CDs in late 2010, and why I've been mostly investing proceeds from those CDs, as they mature, into short-term Treasuries and munis in taxable, and short-term brokered CDs in IRAs, while still taking advantage of exceptional direct CD deals if they happen to be available at the right time.

I bought the fund with the understanding that it was almost cash-like. Cash doesn't lose 1%. Of course I'm talking about nominal losses for nominal cash (cash can lose 1% in real terms).

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Thu Feb 07, 2019 11:17 pm

Doc wrote:
Thu Feb 07, 2019 6:00 pm
<snip>On the other hand I do lump Vg Ultra Short Term Bond (VUBFX) in with the "cash" funds.
Cash doesn't earn 2.9%. As I said, the extra yield appears to be compensation for credit risk, unless there also is hidden term risk, as there was in the Schwab fund.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Doc » Fri Feb 08, 2019 8:47 am

Kevin M wrote:
Thu Feb 07, 2019 11:17 pm
Doc wrote:
Thu Feb 07, 2019 6:00 pm
<snip>On the other hand I do lump Vg Ultra Short Term Bond (VUBFX) in with the "cash" funds.
Cash doesn't earn 2.9%. As I said, the extra yield appears to be compensation for credit risk, unless there also is hidden term risk, as there was in the Schwab fund.

Kevin


Right. I lump the ultra short funds in with cash so that my Quicken "cash" report hits me in the head every month and says "INVEST ME, INVEST ME!" :)

I do consider any fixed income security with less than one year maturity as cash just as Quicken and I think most other financial sites do. Maybe it's an accounting standard?
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Jake Hogan » Fri Feb 08, 2019 9:10 am

Kevin M wrote:
Thu Feb 07, 2019 4:58 pm
deskjockey wrote:
Thu Feb 07, 2019 12:18 pm
Jake Hogan wrote:
Thu Feb 07, 2019 7:17 am
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.

Image

Kevin

Kevin,

Thank you so much for your detailed response...I have a better understanding of how to calculate the TEY in the future.

Additionally...I continue to be amazed by individuals like you on Bogleheads.org who take the time to help so many individuals like me who are not as versed on certain topics. Your contributions have made a difference for me.

Jake

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Re: Vanguard Prime Money Market yield over 2.5%

Post by fishandgolf » Fri Feb 08, 2019 9:36 am

[/quote]


Kevin,

Thank you so much for your detailed response...I have a better understanding of how to calculate the TEY in the future.

Additionally...I continue to be amazed by individuals like you on Bogleheads.org who take the time to help so many individuals like me who are not as versed on certain topics. Your contributions have made a difference for me.

Jake
[/quote]

+10000....agreed......thank you Kevin, Doc and others for your valuable contributions........Neophytes like me do read your work......and learn from it!!

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Re: Vanguard Prime Money Market yield over 2.5%

Post by femur » Fri Feb 08, 2019 10:17 am

Kevin M wrote:
Thu Feb 07, 2019 4:35 pm

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.


Kevin

I have a Vanguard brokerage account and hold Prime Money Market therein. I was able to setup an alternate redemption fund and keep (essentially) a $0 in the settlement money market and all my cash in VMMXX. Whenever I write a check, it ends up drawing right from VMMXX. One thing I have wondered (and asked,but never got a good answer) is if Vanguard Advantage accounts can make use of this alternate redemption fund. If so, you, Keven COULD keep your money in PMM!

Have you tried setting up an alternate redemption fund? Do you know if you can or cannot use those with Vanguard Advantage?

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Fri Feb 08, 2019 1:03 pm

femur wrote:
Fri Feb 08, 2019 10:17 am
I have a Vanguard brokerage account and hold Prime Money Market therein. I was able to setup an alternate redemption fund and keep (essentially) a $0 in the settlement money market and all my cash in VMMXX. Whenever I write a check, it ends up drawing right from VMMXX. One thing I have wondered (and asked,but never got a good answer) is if Vanguard Advantage accounts can make use of this alternate redemption fund. If so, you, Keven COULD keep your money in PMM!

Have you tried setting up an alternate redemption fund? Do you know if you can or cannot use those with Vanguard Advantage?
Cool. If I understand the idea, you specify a non-settlement fund as the one to use to draw from to cover checks. Were you able to do this online, or did you have to call? I'll poke around online and see if I can find anything about it.

Thanks,

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by femur » Fri Feb 08, 2019 2:44 pm

Kevin M wrote:
Fri Feb 08, 2019 1:03 pm
femur wrote:
Fri Feb 08, 2019 10:17 am
I have a Vanguard brokerage account and hold Prime Money Market therein. I was able to setup an alternate redemption fund and keep (essentially) a $0 in the settlement money market and all my cash in VMMXX. Whenever I write a check, it ends up drawing right from VMMXX. One thing I have wondered (and asked,but never got a good answer) is if Vanguard Advantage accounts can make use of this alternate redemption fund. If so, you, Keven COULD keep your money in PMM!

Have you tried setting up an alternate redemption fund? Do you know if you can or cannot use those with Vanguard Advantage?
Cool. If I understand the idea, you specify a non-settlement fund as the one to use to draw from to cover checks. Were you able to do this online, or did you have to call? I'll poke around online and see if I can find anything about it.

Thanks,

Kevin
Check the first page of this form: https://vanguard.com/pdf/bcwbt.pdf
Generally, checks will be paid from your money market settlement fund. However, you may designate any Vanguard money market or bond fund already held in your account as your “alternative redemption fund”—that is, a backup to your settlement fund. If a check is presented for payment and the balance of your settlement fund is insufficient to cover the full amount of the check, we’ll draw the remainder from your alternative redemption fund, subject to certain conditions
Again, I dont know if this works in Vanguard Advantage accounts, but I would love to know the answer if it does.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by carol-brennan » Fri Feb 08, 2019 2:46 pm

ReformedSpender wrote:
Thu Jan 31, 2019 12:54 pm
Time to switch from Capital One

:beer
Two things: Cap one CD rates will net you better than Vguard MM. And they're FDIC insured.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by ginmqi » Fri Feb 08, 2019 6:49 pm

I'm reading the FAQ on Vanguard:
What is a VanguardAdvantage account?

A VanguardAdvantage account lets you consolidate and manage your investment and cash management needs in one convenient place. You get the ability to trade stocks, bonds, certificates of deposit (CDs), and non-Vanguard mutual funds, plus you get cash management features, including unlimited checkwriting, a VanguardAdvantage Visa® Gold debit card, and optional electronic bill payment.

This service is offered to clients of Voyager Select Services® and Flagship Services®.
Looks like the Vanguard Advantage account is only for those with Voyager Select (500k+) and higher clients? (I assume most on here probably have 500k in assets or higher with Vanguard....)

I'm only a lowly Voyager at this time. Would be interested in opening a taxable account and see about moving money over to VMMXX from ally....

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Fri Feb 08, 2019 8:25 pm

femur wrote:
Fri Feb 08, 2019 2:44 pm
Check the first page of this form: https://vanguard.com/pdf/bcwbt.pdf
Generally, checks will be paid from your money market settlement fund. However, you may designate any Vanguard money market or bond fund already held in your account as your “alternative redemption fund”—that is, a backup to your settlement fund. If a check is presented for payment and the balance of your settlement fund is insufficient to cover the full amount of the check, we’ll draw the remainder from your alternative redemption fund, subject to certain conditions
Again, I dont know if this works in Vanguard Advantage accounts, but I would love to know the answer if it does.
Yeah, that form clearly is for checkwriting on funds in regular brokerage accounts. I mentioned earlier that a VG rep told me that you can't do ACH transfers into and out of a fund with checkwriting set up this way--only in a Vanguard Advantage account. I don't want to write checks--just want to pay bills directly from the account (e.g., credit card payments), and I've verified that that works for me. The VA account as no minimums on externally initiated ACH transfers into or out of the account (I tested with a $1 transaction).

Still, maybe they can set up an alternate redemption fund for my VA account. It basically sounds like overdraft protection, which would be ideal. I'll call and ask.

Thanks,

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Fri Feb 08, 2019 8:31 pm

carol-brennan wrote:
Fri Feb 08, 2019 2:46 pm
ReformedSpender wrote:
Thu Jan 31, 2019 12:54 pm
Time to switch from Capital One
:beer
Two things: Cap one CD rates will net you better than Vguard MM. And they're FDIC insured.
You're comparing apples and oranges, but that's OK as long as we clarify the differences.

With a MM fund or savings account, there is no term risk. You can withdraw at any time without losing any value. With a CD or bond, you are either subject to yield changes and bid/ask spreads (for brokered), or early withdrawal penalties for direct CDs.

I'm earning about 2.6% TEY on Treasury MM with no term risk. Cap One 1-year CD earns 2.7%, so you don't get much more. Their rates are OK--better than brokered CDs now, but not great. I recently bought a bunch of a CD that pays 3.0% APY in year 1, 3.5% in year 2, and 4.0% in year 3, and allows penalty-free withdrawals on the anniversary dates. That was a spectacular deal, and I'm really only interested in really great deals these days when it comes to direct CDs, and my preference is that their offered at a bank or credit union I'm already a member of.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by gmaynardkrebs » Sat Feb 09, 2019 3:01 pm

There was a pretty large settlement in the Schwab Ultra Short case. Does anyone know the percent that investors recovered when was said and done? I looked, but couldn't find the info.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Doc » Sat Feb 09, 2019 3:50 pm

gmaynardkrebs wrote:
Sat Feb 09, 2019 3:01 pm
There was a pretty large settlement in the Schwab Ultra Short case. Does anyone know the percent that investors recovered when was said and done? I looked, but couldn't find the info.
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Charles Schwab & Company, Inc., to pay $18 million into a Fair Fund to be established by the Securities and Exchange Commission (SEC) to repay investors in YieldPlus, an ultra short-term bond fund managed by Schwab's affiliate, Charles Schwab Investment Management. The $18 million consists of the $17.5 million in fees that Schwab collected for sales of the fund, plus a fine of $500,000, both of which will have been designated as restitution to customers.

...

Between Sept. 1, 2006, and Feb. 29, 2008, Schwab sold over $13.75 billion in shares of YieldPlus to customers, which accounted for approximately 98 percent of the amount Schwab customers invested in ultra short-term bond funds. During this time period, Schwab's solicited sales of YieldPlus totaled approximately $3.36 billion, approximately 40 percent of which were to customers 65 years of age or older. Schwab collected approximately $17.5 million in fees from sales of the fund.
http://www.finra.org/newsroom/2011/finr ... -bond-fund

17.5/13750*100= .12% ?????

I don't know what the percentage is. Is it the sold amount or the holdings amount in the denominator?

I can't figure how much I got. Probably put the check in a scrapbook somewhere and forgot about it. :annoyed

I had $14000 "invested" when I got out and lost $14.76 on the sale. Of course at the end I was getting dividends of some $60 a month. (I saw the writing on the wall and got out before the end.) :D
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Re: Vanguard Prime Money Market yield over 2.5%

Post by gmaynardkrebs » Sat Feb 09, 2019 4:12 pm

Doc wrote:
Sat Feb 09, 2019 3:50 pm
gmaynardkrebs wrote:
Sat Feb 09, 2019 3:01 pm
There was a pretty large settlement in the Schwab Ultra Short case. Does anyone know the percent that investors recovered when was said and done? I looked, but couldn't find the info.
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Charles Schwab & Company, Inc., to pay $18 million into a Fair Fund to be established by the Securities and Exchange Commission (SEC) to repay investors in YieldPlus, an ultra short-term bond fund managed by Schwab's affiliate, Charles Schwab Investment Management. The $18 million consists of the $17.5 million in fees that Schwab collected for sales of the fund, plus a fine of $500,000, both of which will have been designated as restitution to customers.

...

Between Sept. 1, 2006, and Feb. 29, 2008, Schwab sold over $13.75 billion in shares of YieldPlus to customers, which accounted for approximately 98 percent of the amount Schwab customers invested in ultra short-term bond funds. During this time period, Schwab's solicited sales of YieldPlus totaled approximately $3.36 billion, approximately 40 percent of which were to customers 65 years of age or older. Schwab collected approximately $17.5 million in fees from sales of the fund.
http://www.finra.org/newsroom/2011/finr ... -bond-fund

17.5/13750*100= .12% ?????

I don't know what the percentage is. Is it the sold amount or the holdings amount in the denominator?

I can't figure how much I got. Probably put the check in a scrapbook somewhere and forgot about it. :annoyed

I had $14000 "invested" when I got out and lost $14.76 on the sale. Of course at the end I was getting dividends of some $60 a month. (I saw the writing on the wall and got out before the end.) :D
There was also a $340M private settlement that was distributed. Who got what I could not find. I'm glad you got out with in time. I wasn't aware of this. I have a small amount of money in the Schwab TIPS ETF. Not that they would miss my pittance, but I'm thinking of selling it in protest.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Sat Feb 09, 2019 7:51 pm

Kevin M wrote:
Wed Feb 06, 2019 11:36 am
Kevin M wrote:
Wed Feb 06, 2019 10:24 am
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%).
Yield of Treasury MM increased to 2.33% yesterday. I was going to predict this based on the increase I saw in my dividend accruals over the last couple of days, but I didn't think it would be reflected in the 7-day SEC yield for another day or so, as I calculated the 7-day average of my annualized dividend accrual rates at 2.324% as of yesterday.

I think it's reasonable to expect the Treasury MM yield to rise to about 2.34%, but no higher for awhile, as that is the yield of the 1-month, 2-month and 3-month Treasuries (2.43%) minus the 0.09% expense ratio of the fund. That assumes that these yields will remain a few basis points above the effective federal funds rate (FFR), which has held steady at 2.40% for the last seven weeks (looking at week ending Friday values). Of course it also assumes no changes in the target FFR for awhile, and although the Fed seems to have signaled holding steady for awhile, no one knows for sure.

Below are some charts to consider. First is the history of the FFR, and the 1-month and 3-month constant maturity Treasuries (CMTs), for the week ending Friday 1/5/2018 through the week ending Friday 2/8/2019:

Image

Note that the increases in Treasury yields have flattened out, and the yields have converged to about the FFR. We also see the flattening of the yield curve even at these short terms, with the 3-month at the same yield as the 1-month. I'd think these yields are unlikely to increase much as long as the expectation is that the Fed will not increase the target FFR soon.

The Treasury MM fund holds mostly Treasury Bills, with a dollar weighted average maturity (WAM) of 44.0 days, and a weighted average life (WAL) of 52.0 days as of 1/31/2019 (I get WAM = 43.2 and WAL = 50.6 calculated from a download of the holdings as of 1/31/2019). From Vanguard on WAM:
Represents the weighted average maturity of the fund's holdings using the date of the next interest rate adjustment for certain adjustable-rate securities held by the fund.
Source: https://investor.vanguard.com/mutual-fu ... olio/vusxx

As of 12/31/2018 01/31/2019, the Treasury MM fund held one floating-rate security, representing 2% of the fund's holdings, with an effective term of 1 day 0 days and a term to maturity of 395 364 days. (Edited using holdings from the more recent update).

So I think looking at 1-month, 2-month and 35-month T Bills to estimate VUSXX yield makes sense. The 2-month CMT series started in October 2018, so I didn't include that on the chart; also, it's interesting to see the spread in the yields of the 1-month and 3-month over time.

Here's a chart of the Prime and Treasury MM yields (red and orange) compared to the 1-month and 3-month CMTs (blue and green):

Image

And finally, here's a chart of the MM yields compared to the FFR:

Image

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Re: Vanguard Prime Money Market yield over 2.5%

Post by femur » Sun Feb 10, 2019 5:52 pm

Kevin M wrote:
Fri Feb 08, 2019 8:25 pm
Still, maybe they can set up an alternate redemption fund for my VA account. It basically sounds like overdraft protection, which would be ideal. I'll call and ask.

Thanks,

Kevin
Please update the thread with what you find!

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Re: Vanguard Prime Money Market yield over 2.5%

Post by HEDGEFUNDIE » Sun Feb 10, 2019 7:17 pm

NYCPete wrote:
Thu Jan 31, 2019 1:32 pm
For those less math inclined (or lazy, like me! :P ), I've been using Eaton Vance's Tax Equivalent Yield (TEY) calculator for years, and it can work for many people's situations. EV keeps updating it with tax changes and it has continued to be useful. Notably, for us NYers it can input local taxes (NYC or Yonkers) into the equation as well.

https://funds.eatonvance.com/tax-equiva ... ulator.php
This calculator indicates my TEY for Prime Money Market is 2.75% while Treasuries is at 2.35% (where VUSXX is right now).

Eye-opening.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by gmaynardkrebs » Sun Feb 10, 2019 7:46 pm

HEDGEFUNDIE wrote:
Sun Feb 10, 2019 7:17 pm
NYCPete wrote:
Thu Jan 31, 2019 1:32 pm
For those less math inclined (or lazy, like me! :P ), I've been using Eaton Vance's Tax Equivalent Yield (TEY) calculator for years, and it can work for many people's situations. EV keeps updating it with tax changes and it has continued to be useful. Notably, for us NYers it can input local taxes (NYC or Yonkers) into the equation as well.

https://funds.eatonvance.com/tax-equiva ... ulator.php
This calculator indicates my TEY for Prime Money Market is 2.75% while Treasuries is at 2.35% (where VUSXX is right now).

Eye-opening.
I believe the calculator slightly overstates the tax on non-treasury income, as you can take a deduction within the NII calculation for state income taxation, assuming you are in a state with income tax. That would reduce the the NII surtax by as much as .3% or .4% for some people, to maybe 3.4% or 3.5% on taxable sources. Depends on the state, and your bracket.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by HEDGEFUNDIE » Sun Feb 10, 2019 8:10 pm

gmaynardkrebs wrote:
Sun Feb 10, 2019 7:46 pm
HEDGEFUNDIE wrote:
Sun Feb 10, 2019 7:17 pm
NYCPete wrote:
Thu Jan 31, 2019 1:32 pm
For those less math inclined (or lazy, like me! :P ), I've been using Eaton Vance's Tax Equivalent Yield (TEY) calculator for years, and it can work for many people's situations. EV keeps updating it with tax changes and it has continued to be useful. Notably, for us NYers it can input local taxes (NYC or Yonkers) into the equation as well.

https://funds.eatonvance.com/tax-equiva ... ulator.php
This calculator indicates my TEY for Prime Money Market is 2.75% while Treasuries is at 2.35% (where VUSXX is right now).

Eye-opening.
I believe the calculator slightly overstates the tax on non-treasury income, as you can take a deduction within the NII calculation for state income taxation, assuming you are in a state with income tax. That would reduce the the NII surtax by as much as .3% or .4% for some people, to maybe 3.4% or 3.5% on taxable sources. Depends on the state, and your bracket.
Interesting. I looked up the exact language from Form 8960. It says I can deduct "state, local, and foreign income taxes you paid for the tax year that are attributable to net investment income."

So let's say I had $1000 in NII last year, and paid 9.3% CA income tax on that NII. I can deduct that $93 state tax paid, and then only pay the 3.8% NIIT on $907? Which works out to 3.44% of the $1000?

Which brings the 2.75% TEY of Prime Money Market down to 2.73%. Still eye-opening.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Riley15 » Sun Feb 10, 2019 9:34 pm

Doc wrote:
Sat Feb 09, 2019 3:50 pm
[

I had $14000 "invested" when I got out and lost $14.76 on the sale. Of course at the end I was getting dividends of some $60 a month. (I saw the writing on the wall and got out before the end.) :D
So what was so apparent when the NAV dipped that you decided to sell? Bonds always fluctuate in NAV depending on what the latest news is, even short term bonds but it's understood that over time the downs and ups cancel out and most of your return is from dividends. But that didn't end up being the case for this fund.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Sun Feb 10, 2019 11:28 pm

HEDGEFUNDIE wrote:
Sun Feb 10, 2019 7:17 pm
NYCPete wrote:
Thu Jan 31, 2019 1:32 pm
For those less math inclined (or lazy, like me! :P ), I've been using Eaton Vance's Tax Equivalent Yield (TEY) calculator for years, and it can work for many people's situations. EV keeps updating it with tax changes and it has continued to be useful. Notably, for us NYers it can input local taxes (NYC or Yonkers) into the equation as well.

https://funds.eatonvance.com/tax-equiva ... ulator.php
This calculator indicates my TEY for Prime Money Market is 2.75% while Treasuries is at 2.35% (where VUSXX is right now).

Eye-opening.
This calculator has several problems.

First, it's not showing you generic TEY. It's showing you the TEY you'd need to match a specific in-state muni bond yield. That's not what I think most people mean when they refer to taxable equivalent yield. The TEY of a specific fund or bond doesn't change based on what you're comparing it to; for example, you wouldn't compare the TEY of a long-term Treasury fund to a short-term in-state muni fund.

Saying that your TEY for Prime MM is 2.75% makes no sense. Unless you get a state tax exemption for income from the US government obligations in Prime MM (28.23% in 2018), your TEY is the same as the state yield of 2.47%. If you do get a state tax exemption, it'll bump it up some, but probably not to 2.75%.

Second, it's showing you your top tax brackets, not your marginal tax rates, and the top federal tax bracket it shows will change depending on whether or not you include QD/LTCG in your "taxable income". If I include QD/LTCG, it tells me my federal income tax rate is 22%, and if I don't, it tells me that it's 12%. Neither of these is correct. My tax bracket is 12%, but my marginal tax rate is 27%, due to each marginal dollar of interest income pushing an additional dollar of QD/LTCG from the 0% to 15% tax rate.

Kevin
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Re: Vanguard Prime Money Market yield over 2.5%

Post by HEDGEFUNDIE » Sun Feb 10, 2019 11:36 pm

Kevin M wrote:
Sun Feb 10, 2019 11:28 pm
HEDGEFUNDIE wrote:
Sun Feb 10, 2019 7:17 pm
NYCPete wrote:
Thu Jan 31, 2019 1:32 pm
For those less math inclined (or lazy, like me! :P ), I've been using Eaton Vance's Tax Equivalent Yield (TEY) calculator for years, and it can work for many people's situations. EV keeps updating it with tax changes and it has continued to be useful. Notably, for us NYers it can input local taxes (NYC or Yonkers) into the equation as well.

https://funds.eatonvance.com/tax-equiva ... ulator.php
This calculator indicates my TEY for Prime Money Market is 2.75% while Treasuries is at 2.35% (where VUSXX is right now).

Eye-opening.
This calculator has several problems.

First, it's not showing you generic TEY. It's showing you the TEY you'd need to match a specific in-state muni bond yield. That's not what I think most people mean when they refer to taxable equivalent yield. The TEY of a specific fund or bond doesn't change based on what you're comparing it to; for example, you wouldn't compare the TEY of a long-term Treasury fund to a short-term in-state muni fund.

Saying that your TEY for Prime MM is 2.75% makes no sense. Unless you get a state tax exemption for income from the US government obligations in Prime MM (28.23% in 2018), your TEY is the same as the state yield of 2.47%. If you do get a state tax exemption, it'll bump it up some, but probably not to 2.75%.

Second, it's showing you your top tax brackets, not your marginal tax rates, and the top federal tax bracket it shows will change depending on whether or not you include QD/LTCG in your "taxable income". If I include QD/LTCG, it tells me my federal income tax rate is 22%, and if I don't, it tells me that it's 12%. Neither of these is correct. My tax bracket is 12%, but my marginal tax rate is 27%, due to each marginal dollar of interest income pushing an additional dollar of QD/LTCG from the 0% to 15% tax rate.

Kevin
Let's assume I have no QD/LTCG, then my marginal tax rate on interest income should simply be my top income tax bracket, no?

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Re: Vanguard Prime Money Market yield over 2.5%

Post by gmaynardkrebs » Mon Feb 11, 2019 8:54 am

HEDGEFUNDIE wrote:
Sun Feb 10, 2019 11:36 pm
Kevin M wrote:
Sun Feb 10, 2019 11:28 pm
HEDGEFUNDIE wrote:
Sun Feb 10, 2019 7:17 pm
NYCPete wrote:
Thu Jan 31, 2019 1:32 pm
For those less math inclined (or lazy, like me! :P ), I've been using Eaton Vance's Tax Equivalent Yield (TEY) calculator for years, and it can work for many people's situations. EV keeps updating it with tax changes and it has continued to be useful. Notably, for us NYers it can input local taxes (NYC or Yonkers) into the equation as well.

https://funds.eatonvance.com/tax-equiva ... ulator.php
This calculator indicates my TEY for Prime Money Market is 2.75% while Treasuries is at 2.35% (where VUSXX is right now).

Eye-opening.
This calculator has several problems.

First, it's not showing you generic TEY. It's showing you the TEY you'd need to match a specific in-state muni bond yield. That's not what I think most people mean when they refer to taxable equivalent yield. The TEY of a specific fund or bond doesn't change based on what you're comparing it to; for example, you wouldn't compare the TEY of a long-term Treasury fund to a short-term in-state muni fund.

Saying that your TEY for Prime MM is 2.75% makes no sense. Unless you get a state tax exemption for income from the US government obligations in Prime MM (28.23% in 2018), your TEY is the same as the state yield of 2.47%. If you do get a state tax exemption, it'll bump it up some, but probably not to 2.75%.

Second, it's showing you your top tax brackets, not your marginal tax rates, and the top federal tax bracket it shows will change depending on whether or not you include QD/LTCG in your "taxable income". If I include QD/LTCG, it tells me my federal income tax rate is 22%, and if I don't, it tells me that it's 12%. Neither of these is correct. My tax bracket is 12%, but my marginal tax rate is 27%, due to each marginal dollar of interest income pushing an additional dollar of QD/LTCG from the 0% to 15% tax rate.

Kevin
Let's assume I have no QD/LTCG, then my marginal tax rate on interest income should simply be my top income tax bracket, no?
I have very little QD/LTCG, so for me it was my top federal bracket, plus NII, plus state (-NII desuction). Since I'm not in Medicare B or getting SS yet, I didn't have to worry about MAGI, but that might also be a wrinkle that is not included in the calculator.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by geospatial » Mon Feb 11, 2019 11:11 am

Kevin M wrote:
Sun Feb 10, 2019 11:28 pm
My tax bracket is 12%, but my marginal tax rate is 27%, due to each marginal dollar of interest income pushing an additional dollar of QD/LTCG from the 0% to 15% tax rate.
Kevin
Can you explain this a little bit further? Are you saying that an additional dollar of interest income for you is taxed at 12% as income for federal tax purposes and taxed an additional 15% as LTCG?

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Mon Feb 11, 2019 11:17 am

HEDGEFUNDIE wrote:
Sun Feb 10, 2019 11:36 pm
Let's assume I have no QD/LTCG, then my marginal tax rate on interest income should simply be my top income tax bracket, no?
Not necessarily. There are all kinds of things that can cause your marginal tax rate to be different than your top tax bracket. Other than the pushing QD/LTCG from a lower to higher rate, other things are pushing SS income from being taxed at 0% to 50% or from 50% to 85%, phase-outs of various deductions and credits, AMT, NIIT, etc.

The best way I know of to determine your actual marginal tax rates is to use tax software, and increase or decrease the marginal income you're interested in by $1,000, then divide the difference in tax by $1,000. Some people's marginal tax rates will indeed be the same as their top tax brackets, but I wouldn't assume this without verifying it.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Mon Feb 11, 2019 11:23 am

geospatial wrote:
Mon Feb 11, 2019 11:11 am
Kevin M wrote:
Sun Feb 10, 2019 11:28 pm
My tax bracket is 12%, but my marginal tax rate is 27%, due to each marginal dollar of interest income pushing an additional dollar of QD/LTCG from the 0% to 15% tax rate.
Kevin
Can you explain this a little bit further? Are you saying that an additional dollar of interest income for you is taxed at 12% as income for federal tax purposes and taxed an additional 15% as LTCG?
Close, but not exactly. QD/LTCG is stacked on top of ordinary taxable income. Inserting a dollar of interest income (ordinary) in the bottom stack pushes a dollar of QD/LTCG from below the 0%/15% line to above it, in addition to incurring 12% tax on the dollar of interest income. The net effect is a 27% tax on the extra dollar of interest income.

So once all of my ordinary income is taxed at 12%, my marginal tax rate on ordinary income drops from 27% to 22%, since all QD/LTCG already would be taxed at 15%, and the extra dollar of ordinary income will be taxed at 22%. Interesting: higher ordinary income -> lower marginal tax rate.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Doc » Mon Feb 11, 2019 11:49 am

Riley15 wrote:
Sun Feb 10, 2019 9:34 pm
Doc wrote:
Sat Feb 09, 2019 3:50 pm
[

I had $14000 "invested" when I got out and lost $14.76 on the sale. Of course at the end I was getting dividends of some $60 a month. (I saw the writing on the wall and got out before the end.) :D
So what was so apparent when the NAV dipped that you decided to sell? Bonds always fluctuate in NAV depending on what the latest news is, even short term bonds but it's understood that over time the downs and ups cancel out and most of your return is from dividends. But that didn't end up being the case for this fund.
I sold it well before it dropped and bought T-bills which I rolled for a while. I don't remember exactly why I decided the Yield Plus fund was high risk but it was not due to a price drop.
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Re: Vanguard Prime Money Market yield over 2.5%

Post by geospatial » Mon Feb 11, 2019 12:39 pm

Kevin M wrote:
Mon Feb 11, 2019 11:23 am
geospatial wrote:
Mon Feb 11, 2019 11:11 am
Kevin M wrote:
Sun Feb 10, 2019 11:28 pm
My tax bracket is 12%, but my marginal tax rate is 27%, due to each marginal dollar of interest income pushing an additional dollar of QD/LTCG from the 0% to 15% tax rate.
Kevin
Can you explain this a little bit further? Are you saying that an additional dollar of interest income for you is taxed at 12% as income for federal tax purposes and taxed an additional 15% as LTCG?
Close, but not exactly. QD/LTCG is stacked on top of ordinary taxable income. Inserting a dollar of interest income (ordinary) in the bottom stack pushes a dollar of QD/LTCG from below the 0%/15% line to above it, in addition to incurring 12% tax on the dollar of interest income. The net effect is a 27% tax on the extra dollar of interest income.

So once all of my ordinary income is taxed at 12%, my marginal tax rate on ordinary income drops from 27% to 22%, since all QD/LTCG already would be taxed at 15%, and the extra dollar of ordinary income will be taxed at 22%. Interesting: higher ordinary income -> lower marginal tax rate.

Kevin
I apologize if I'm taking this off-topic but I just wanted to make sure I fully understand this. I get what you're saying, but would like to run some numbers. (filing as "Single" in all examples)

LTCG rates for 2019 are as follows:
0% for taxable income from $0 to $39,375.
15% for taxable income from $39,376 to $434,550.
20% for taxable income greater than $434,550.

And 2019 federal tax brackets are as follows:
10% for $0 to $9,700 taxable income
12% for $9,701 to $39,475
22% for $39,476 to $84,200
24% for $84,201 to $160,725
etc...

Scenario: I have expected ordinary taxable income this year of $34,000 (after deductions) and expect to sell a non-dividend yielding investment I've held for over a year in a taxable account for a profit of $5000. This AGI of $39,000 puts me in the 12% federal tax bracket and 0% LTCG bracket. Let's say I've suddenly learned about all these wonderful online bank accounts and I'm thinking about taking $20,000 sitting in a cookie jar and depositing it in an account yielding 2.5% APY. The expected interest earned on that in 2019 would be $500. That would increase my AGI to $39,500. How much of that would be subject to the 22% marginal tax rate and/or how much of that would be subject to the 15% LTCG tax? Is any part of that taxed at 27%?

And if we changed the $34,000 to $39,000 instead for ordinary taxable income but keep the investment sale profit and potential bank deposit amount/rate the same in the scenario, how does that affect the rates?

EDIT: editing to add my guess
In first scenario, the $34,000 + $500 of ordinary/interest income is taxed at 12%. $4,875 of LTCG is taxed at 0% and $125 of it is taxed at 15%. (so $125 of the bank interest is taxed at 12%, but also forces $125 of the LTCG into the 15% tax bracket)
In second scenario, the $39,000 of ordinary income is taxed at 12%, $475 of interest income taxed at 12% and $25 of interest income taxed at 22%, and all $5000 of LTCG is taxed at 15%.

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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Mon Feb 11, 2019 1:16 pm

geospatial wrote:
Mon Feb 11, 2019 12:39 pm
EDIT: editing to add my guess
In first scenario, the $34,000 + $500 of ordinary/interest income is taxed at 12%. $4,875 of LTCG is taxed at 0% and $125 of it is taxed at 15%. (so $125 of the bank interest is taxed at 12%, but also forces $125 of the LTCG into the 15% tax bracket)
In second scenario, the $39,000 of ordinary income is taxed at 12%, $475 of interest income taxed at 12% and $25 of interest income taxed at 22%, and all $5000 of LTCG is taxed at 15%.
This looks close to correct to me. I think you've got it! Only modification is that the bottom slice of ordinary income is taxed at 10%, and the next slice above at 12%.

Also, your taxable income is not your AGI, it's AGI minus deductions plus credits. AGI and taxable income are different lines on your 1040.

Kevin
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geospatial
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Re: Vanguard Prime Money Market yield over 2.5%

Post by geospatial » Mon Feb 11, 2019 1:27 pm

Kevin M wrote:
Mon Feb 11, 2019 1:16 pm
geospatial wrote:
Mon Feb 11, 2019 12:39 pm
EDIT: editing to add my guess
In first scenario, the $34,000 + $500 of ordinary/interest income is taxed at 12%. $4,875 of LTCG is taxed at 0% and $125 of it is taxed at 15%. (so $125 of the bank interest is taxed at 12%, but also forces $125 of the LTCG into the 15% tax bracket)
In second scenario, the $39,000 of ordinary income is taxed at 12%, $475 of interest income taxed at 12% and $25 of interest income taxed at 22%, and all $5000 of LTCG is taxed at 15%.
This looks close to correct to me. I think you've got it! Only modification is that the bottom slice of ordinary income is taxed at 10%, and the next slice above at 12%.

Also, your taxable income is not your AGI, it's AGI minus deductions plus credits. AGI and taxable income are different lines on your 1040.

Kevin
Of course. I glossed over the 10%/12% distinction being more focused on all the drama at the 12%/22% and 0%/15% thresholds. And yes, I was sloppy interchanging taxable income and AGI as synonymous. It seems that LTCG tax impacts and interpretation of "functional" marginal tax rates are primarily an issue when LTCG + ordinary income together get one within a few thousand dollars of the tax bracket thresholds, so if one has some flexibility they can optimize their decision-making. But that's probably only happening in a minority of cases.

Anyway, thanks for the bonus coverage. I don't want to distract anymore from the VMMXX talk.

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gmaynardkrebs
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Re: Vanguard Prime Money Market yield over 2.5%

Post by gmaynardkrebs » Mon Feb 11, 2019 2:09 pm

geospatial wrote:
Mon Feb 11, 2019 1:27 pm
Kevin M wrote:
Mon Feb 11, 2019 1:16 pm
geospatial wrote:
Mon Feb 11, 2019 12:39 pm
EDIT: editing to add my guess
In first scenario, the $34,000 + $500 of ordinary/interest income is taxed at 12%. $4,875 of LTCG is taxed at 0% and $125 of it is taxed at 15%. (so $125 of the bank interest is taxed at 12%, but also forces $125 of the LTCG into the 15% tax bracket)
In second scenario, the $39,000 of ordinary income is taxed at 12%, $475 of interest income taxed at 12% and $25 of interest income taxed at 22%, and all $5000 of LTCG is taxed at 15%.
This looks close to correct to me. I think you've got it! Only modification is that the bottom slice of ordinary income is taxed at 10%, and the next slice above at 12%.

Also, your taxable income is not your AGI, it's AGI minus deductions plus credits. AGI and taxable income are different lines on your 1040.

Kevin
Of course. I glossed over the 10%/12% distinction being more focused on all the drama at the 12%/22% and 0%/15% thresholds. And yes, I was sloppy interchanging taxable income and AGI as synonymous. It seems that LTCG tax impacts and interpretation of "functional" marginal tax rates are primarily an issue when LTCG + ordinary income together get one within a few thousand dollars of the tax bracket thresholds, so if one has some flexibility they can optimize their decision-making. But that's probably only happening in a minority of cases.

Anyway, thanks for the bonus coverage. I don't want to distract anymore from the VMMXX talk.
I'll add one more wrinkle. The new lower rate on Qualified Bsiness Income (QBI) starts to phase out at higher incomes, which also raises the effective marginal rate. In my case, it added an additional 1.7% to what I thought my marginal rate was.

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TheGreyingDuke
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Re: Vanguard Prime Money Market yield over 2.5%

Post by TheGreyingDuke » Mon Feb 11, 2019 6:39 pm

Just off the phone with Vanguard, designating an alternative fund for check writing is NOT available with the Advantage accounts, stuck with the Federal MM.
"Every time I see an adult on a bicycle, I no longer despair for the future of the human race." H.G. Wells

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femur
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Re: Vanguard Prime Money Market yield over 2.5%

Post by femur » Mon Feb 11, 2019 9:17 pm

TheGreyingDuke wrote:
Mon Feb 11, 2019 6:39 pm
Just off the phone with Vanguard, designating an alternative fund for check writing is NOT available with the Advantage accounts, stuck with the Federal MM.
Thanks for the update!

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Kevin M
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Tue Feb 12, 2019 1:54 pm

femur wrote:
Mon Feb 11, 2019 9:17 pm
TheGreyingDuke wrote:
Mon Feb 11, 2019 6:39 pm
Just off the phone with Vanguard, designating an alternative fund for check writing is NOT available with the Advantage accounts, stuck with the Federal MM.
Thanks for the update!
Ditto. Saved me a phone call.
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Momus
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Momus » Sun Feb 17, 2019 5:01 pm

I post so I can save this thread for later use 8-)

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zaplunken
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Re: Vanguard Prime Money Market yield over 2.5%

Post by zaplunken » Sun Feb 17, 2019 5:07 pm

Momus wrote:
Sun Feb 17, 2019 5:01 pm
I post so I can save this thread for later use 8-)
Or you could just Subscribe. :wink:

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Kevin M
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Re: Vanguard Prime Money Market yield over 2.5%

Post by Kevin M » Wed Feb 20, 2019 10:54 am

Kevin M wrote:
Sat Feb 09, 2019 7:51 pm
Kevin M wrote:
Wed Feb 06, 2019 11:36 am
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%).
Yield of Treasury MM increased to 2.33% yesterday. I was going to predict this based on the increase I saw in my dividend accruals over the last couple of days, but I didn't think it would be reflected in the 7-day SEC yield for another day or so, as I calculated the 7-day average of my annualized dividend accrual rates at 2.324% as of yesterday.

I think it's reasonable to expect the Treasury MM yield to rise to about 2.34%
, but no higher for awhile, as that is the yield of the 1-month, 2-month and 3-month Treasuries (2.43%) minus the 0.09% expense ratio of the fund. That assumes that these yields will remain a few basis points above the effective federal funds rate (FFR), which has held steady at 2.40% for the last seven weeks (looking at week ending Friday values). Of course it also assumes no changes in the target FFR for awhile, and although the Fed seems to have signaled holding steady for awhile, no one knows for sure.
Prime MM yield fell another basis point to 2.46% yesterday; this is a compound yield of 2.49%.

As predicted in the post quoted above, Treasury MM fund (VUSXX) yield increased to 2.34% yesterday. The 1-month, 2-month and 3-month Treasury CMT yields from treasury.gov as of yesterday were 2.44%, 2.42%, and 2.45% respectively, so I think Treasury MM yield is at a peak unless the short-term Treasury yields increase. As mentioned in my earlier post, I think this is unlikely unless the Fed telegraphs a rate hike in the near future.

The taxable-equivalent compound yield (TECY) of VUSXX at 27% and 8% marginal tax rates is 2.66%.

In working on my taxes, it looks like my taxable income, including QD/LTCG, might have been slightly below the top of the QD/LTCG 0% tax rate ($77,200), which means my federal marginal tax rate was 12% instead of 27% for 2018. At marginal rates of 12% fed and 8% state, the TECY of VUSXX is 2.61%, so still significantly higher than the best regular bank savings account rates. The lower fed marginal tax rate doesn't have a big impact on the TEY of Treasuries (or a Treasury fund), as it's the marginal state tax rate that has the biggest impact.

Kevin
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