Why is Vanguard Treasury Money Market yield so high?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

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.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Electron
Posts: 1919
Joined: Sat Mar 10, 2007 8:46 pm

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%.
Electron

venus_06
Posts: 17
Joined: Fri Dec 14, 2018 12:46 am

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.

User avatar
Topic Author
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

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.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Topic Author
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

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

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
ReformedSpender
Posts: 388
Joined: Fri Mar 16, 2018 1:24 pm
Location: Stone's Throw from Vanguard

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
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

User avatar
Topic Author
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

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.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Artsdoctor
Posts: 4129
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

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.

User avatar
Topic Author
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

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

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
Electron
Posts: 1919
Joined: Sat Mar 10, 2007 8:46 pm

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

Post by Electron » Fri Nov 15, 2019 10:30 pm

It looks like the higher yields from Vanguard Federal Money Market fund only lasted a short time. Here is an updated chart showing the unadjusted SEC yields for VUSXX, VMFXX, and VMSXX.

You can see how the Federal Money Market fund yield exceeded that of the Treasury fund for a period of time but has now dropped below it.

I have a feeling that the relationship changed following the Fed's recent intervention in the repo market.

Image
Electron

User avatar
Artsdoctor
Posts: 4129
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

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

Post by Artsdoctor » Sat Nov 16, 2019 9:47 am

I appreciate having Federal Money Market as a cash settlement account, but as a California resident, I would not make it my primary cash holding if I had considerable cash assets. Everyone will need to do their own math, but for my needs, it's about comparing Treasury Money Market to California Tax-Free Money Market (Prime has been out of the running for a while). Treasury has consistently led even with a relatively high federal investment marginal tax rate. The "risk" of using Federal Money Market lies in my inability to calculate the percentage of US obligations in the fund which will be exempt from state income tax. California requires that over 50% of the fund has specific government obligations so if it winds up having 52%, you're going to get a credit for that percentage. However, if it has 49%, you're going to get nothing. You'd like to think that last year's percentage > 70% should give you plenty of buffer but I don't know of any way to "bank" on that. It has been below 50% in the past.

User avatar
Topic Author
Kevin M
Posts: 11252
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

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

Post by Kevin M » Sat Nov 16, 2019 1:58 pm

Artsdoctor wrote:
Sat Nov 16, 2019 9:47 am
I appreciate having Federal Money Market as a cash settlement account, but as a California resident, I would not make it my primary cash holding if I had considerable cash assets. Everyone will need to do their own math, but for my needs, it's about comparing Treasury Money Market to California Tax-Free Money Market (Prime has been out of the running for a while). Treasury has consistently led even with a relatively high federal investment marginal tax rate. The "risk" of using Federal Money Market lies in my inability to calculate the percentage of US obligations in the fund which will be exempt from state income tax. California requires that over 50% of the fund has specific government obligations so if it winds up having 52%, you're going to get a credit for that percentage. However, if it has 49%, you're going to get nothing. You'd like to think that last year's percentage > 70% should give you plenty of buffer but I don't know of any way to "bank" on that. It has been below 50% in the past.
Pretty much agree with all of this, but I'm more optimistic that the 2018 percentage is reasonable to use for estimating 2019 TEY. Note that about 85% of holdings are in Treasury Bills (47.0%) and USGO (37.6%) as of 10/31/2019, and it's been about this every time I've checked in recent months.

Still, Treasury MM currently has a higher TEY than Fed MM for someone in your situation (and mine), using the 2018 USGO number for Fed MM. Here are the current compound TEYs at my marginal tax rates of 27% fed and 8% state, and at 40.8% fed (37% + 3.8% NIIT) and 10.3% state, using the 2018 USGO numbers for Fed MM:

27%/8%, 40.8%/10.3%, Fund

1.95%, 2.10% - Treasury MM
1.85%, 1.96% - Fed MM
1.80%, 1.80% - Prime MM
1.53%, 1.98% - Muni MM
1.44%, 1.92% - CA Muni MM

Observations:
  • Treasury MM has highest TEY for both sets of marginal tax rates.
  • Fed MM is second highest for me, third highest for the higher rates (losing to Muni MM by a smidge).
  • Prime MM is third highest for me, but last place for higher rates.
  • Muni MM is fourth highest for me, but second highest for higher rates (beating Fed MM by a smidge).
  • CA Muni MM is last place for me, but fourth place for higher rates.
  • Muni MM (national) has higher TEY for both sets of rates, so should be considered in addition to the CA muni fund if/when the muni yields are more competitive.
So it's pretty much a no-brainer for any CA resident in the range of the indicated tax rates to prefer Treasury MM in taxable accounts--it has the highest TEY, and is the safest. There's not much point in evaluating the alternatives, except with respect to how lazy one wants to be in moving cash from the Fed MM settlement fund to Treasury MM; my current threshold is $500.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

retiringwhen
Posts: 1438
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

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

Post by retiringwhen » Sat Nov 16, 2019 6:30 pm

To help you do your own homework, I built the spreadsheet explained on the attached page. It has a CA tab, you can use it directly or copy the sheet and customize rates or USGO percentages as you desire. It is automatically updated using Vanguard's site thanks to Kevin M's infrastructure. Enjoy. I will try to keep the site up to date with new annual data as long as it is useful.

Vanguard Money Market Yield Analyses

Post Reply