Why is Vanguard Treasury Money Market yield so high?

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Kevin M
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Re: Why is Vanguard Treasury Money Market yield so low?

Post by Kevin M » Fri Jul 12, 2019 7:10 pm

Leif wrote:
Fri Jul 12, 2019 2:37 pm
Kevin M wrote:
Fri Jul 12, 2019 1:04 pm
The title of this thread was accurate at the time of the OP, as it had nothing to do with state tax exemption, but simply the raw SEC yield of VUSXX compared to the 1m, 2m, and 3m Treasury yields. The yield no longer is high relative to the Tbills, so the title does not apply at this moment.
Thats right. It just is surprising to me how rapid VUSXX has dropped relative to VMFXX. That is why I'm asking why is the Vanguard Treasury Money Market yield is so low.
Or, now we could ask why VMFXX yield is so high? VUSXX yield can now be pretty much explained by Treasury yields--it's just that it took a rapid decline in yield to get back to that being the case since before the OP date. As of today, VUSXX yield still is only 2 bps below the Tbill average I calculate as being relevant.

So why is VMFXX yield so high?

If I knew for certain that the percent of income from USGO would be at least as high as last year, I probably would move everything from VUSXX to VMFXX--it only takes a minute or so to do. Maybe the fund managers are keeping VMFXX yield relatively high by moving into more non-USGO securities, which would lower the TEY for those of us who pay state income tax.

Oh, and for those who wouldn't have $50K to get back into VUSXX but are in it now, just leave a few dollars in it, and it will stay open. At least that's the way it's been for me for all VG MM funds over the years, including VUSXX in the last year or so.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Electron » Sat Jul 13, 2019 4:20 pm

I'm staying with VUSXX for the time being. Vanguard Federal Money Market is currently only 3.9 basis points higher on an after-tax basis for my case.

The spread relative to VUSXX seems unusually high at present. I looked at the data going back to 2015 and high spreads never persisted very long. That was especially true over the last two years.

It's also possible that the relationships will be different in the period ahead.

Spreads were generally higher in earlier years when the percentage in U.S. Government obligations was lower. At the end of 2007 VMFXX yielded 4.46% while VUSXX had a yield of 3.85%. The percentage in U.S. Government obligations was quite low that year at 21.37%.
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by venus_06 » Tue Aug 13, 2019 6:35 pm

I make a spreadsheet to track my TEYs for VG's Prime, Federal, and Treasury money market funds (I estimated State tax exempt percentage for the first two funds based on prior year's obligation), and depending on the spread between VMFXX and VUSXX one or the other is slightly better for me. However, since I'm using the 7-day SEC yield, isn't it not accurate enough if I wanted to "chase yields" and make switches between the two funds? Say for example, VUSXX had a relatively higher yield Aug 7-11 but yields are dropping Aug 12 and 13, so the 7-day SEC yield I see on the website is still higher because of the averaging from previous days. Since distributions are accrued daily, wouldn't I already have missed out on the higher yields from Aug 7-11 if I make a switch over on the 13th? What's a better way to monitor the yields and calculate when to switch funds? I don't see a daily income distribution anywhere on their website, only the 7-day SEC yield and compound yield. I guess at the end of the day the differences are so minimal that it probably doesn't actually matter, but I'm curious how other people track it.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Tue Aug 13, 2019 7:56 pm

venus_06 wrote:
Tue Aug 13, 2019 6:35 pm
I make a spreadsheet to track my TEYs for VG's Prime, Federal, and Treasury money market funds (I estimated State tax exempt percentage for the first two funds based on prior year's obligation), and depending on the spread between VMFXX and VUSXX one or the other is slightly better for me. However, since I'm using the 7-day SEC yield, isn't it not accurate enough if I wanted to "chase yields" and make switches between the two funds? Say for example, VUSXX had a relatively higher yield Aug 7-11 but yields are dropping Aug 12 and 13, so the 7-day SEC yield I see on the website is still higher because of the averaging from previous days. Since distributions are accrued daily, wouldn't I already have missed out on the higher yields from Aug 7-11 if I make a switch over on the 13th? What's a better way to monitor the yields and calculate when to switch funds? I don't see a daily income distribution anywhere on their website, only the 7-day SEC yield and compound yield. I guess at the end of the day the differences are so minimal that it probably doesn't actually matter, but I'm curious how other people track it.
It's true that if yield is increasing or decreasing rapidly, the SEC yield will lag the daily yield you actually earn. The only way I know to determine the daily yield is to calculate it using two successive days of accrued dividends using Balances By Date, with a large enough holding in the fund to get sufficient resolution.

Treasury and Fed MM yields are so close that the difference in TEY for me is only a couple of basis points, with Treasury MM a bit in the lead using 7-day yields. Given the uncertainty in the percentage of income from government obligations in Fed MM, I'd go for Treasury MM if the TEYs are this close.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Tue Aug 20, 2019 3:00 pm

Here's an update of the SEC yield vs. my model. I added a 7-day trailing average of the 30-,60- and 90-day averages of the 1m, 2m, and 3m Treasuries (respectively) minus the 0.09% ER, which should better represent the 7-day SEC yield, and it is indeed usually closer.

Image

As of yesterday, 8/19, the values were:

2.05% - 30,60,90 day average of 1m, 2m, 3m Treasuries minus 0.09% ER.
2.06% - 7-day trailing average of above.
2.08% - SEC yield

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by ReformedSpender » Fri Aug 30, 2019 8:29 pm

Whelp, that yield was fun while it lasted.

Now to look for an alternative...

:beer
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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sat Aug 31, 2019 4:47 pm

ReformedSpender wrote:
Fri Aug 30, 2019 8:29 pm
Whelp, that yield was fun while it lasted.

Now to look for an alternative...

:beer
It's still not bad compared to the alternatives.

Compound TEY of VUSXX for me is 2.29% with SEC yield at 2.02% (which incidentally now exactly matches my model yield), which is better than Ally savings at 1.90% APY, but not as good as my best bank which earns 2.50% guaranteed through June or July 2020. The 1m Tbill yield now is 2.10%, which for me is TEY of 2.36%, so my bank still wins.

And you can't get higher yield by extending Treasury maturity, with yield decreasing out to 5-year maturity at 1.39%, then climbing from there to only 1.96% for 30y Treasury.

Direct CDs once again are looking good, if you're willing to shop around and open new accounts, or are lucky enough to already be a member of a bank or credit union offering competitive CD yields. I'm seeing 2-year CDs at 2.80% and 5-year in the 3% ballpark, so very large yield premiums over Treasuries of same maturities.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Artsdoctor » Sat Aug 31, 2019 6:04 pm

Kevin,

You have a very good deal with your best bank. Although the VUSXX offers a TEY to me of about 2.5% right now, there's no way I'd bet that it would be maintained for the next year. Although one can never predict interest rates, it would be a surprise for most if rates did not trend downwards (again) and if you can lock in a savings rate of 2.50% for a year with total liquidity and no strings attached, that's probably one of the best rates out there.

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Re: Why is Vanguard Treasury Money Market yield so high?

Post by Kevin M » Sat Aug 31, 2019 8:05 pm

Artsdoctor wrote:
Sat Aug 31, 2019 6:04 pm
Kevin,

You have a very good deal with your best bank. Although the VUSXX offers a TEY to me of about 2.5% right now, there's no way I'd bet that it would be maintained for the next year. Although one can never predict interest rates, it would be a surprise for most if rates did not trend downwards (again) and if you can lock in a savings rate of 2.50% for a year with total liquidity and no strings attached, that's probably one of the best rates out there.
Yep, it is good, and I actually have two banks currently paying 2.5%. And with four beneficiaries on a POD account I can have up to $1M at one bank with full FDIC insurance coverage.

I expect the VUSXX yield to continue falling, as the market expects short-term yields to continue falling. The 3m yield at 1.99% is lower than the 1m yield at 2.10% (and 6m is at 1.89%). CME FedWatch indicates 97% probability of another 25 basis point reduction in the Fed funds rate at the Sep 18 FOMC meeting, and we are seeing this in the inverted yield curve at the short end.

So I actually think short-term rates are much more predictable than longer-term rates, especially with the Fed telegraphing additional rate cuts (from what I understand).

Here is latest chart of VUSXX SEC yield and my model yields:

Image

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