Vanguard municipal money market fund yield, almost 4%

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Smokey21
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Joined: Fri Oct 31, 2014 7:07 am

Vanguard municipal money market fund yield, almost 4%

Post by Smokey21 » Wed Mar 25, 2020 6:51 am

7 day sec yield is listed at 3.77% this morning. What are the risks, drawbacks?

yohac
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Joined: Sat Sep 01, 2018 1:42 pm

Re: Vanguard municipal money market fund yield, almost 4%

Post by yohac » Wed Mar 25, 2020 7:39 am

I suppose there is a minimal risk is that it breaks the buck. The drawback is that rate is a short-term anomaly caused by the recent turmoil in the muni market. Once that sorts out you can expect the rate to drop near zero. But maybe it's a free lunch, for a week or two.

dbr
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Re: Vanguard municipal money market fund yield, almost 4%

Post by dbr » Wed Mar 25, 2020 8:33 am

yohac wrote:
Wed Mar 25, 2020 7:39 am
I suppose there is a minimal risk is that it breaks the buck. The drawback is that rate is a short-term anomaly caused by the recent turmoil in the muni market. Once that sorts out you can expect the rate to drop near zero. But maybe it's a free lunch, for a week or two.
Agreed. The risk is that interest rates are unpredictable.

pmj78910
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Re: Vanguard municipal money market fund yield, almost 4%

Post by pmj78910 » Wed Mar 25, 2020 8:40 am

yohac wrote:
Wed Mar 25, 2020 7:39 am
I suppose there is a minimal risk is that it breaks the buck. The drawback is that rate is a short-term anomaly caused by the recent turmoil in the muni market. Once that sorts out you can expect the rate to drop near zero. But maybe it's a free lunch, for a week or two.

I know that these municpal money market funds (VMSXX) are not FDIC insured, but didn't the Fed recently announce that these would be backstopped. That provides some level of protection from breaking the buck, right? As far as the current high interest, I agree that rates will drop to near zero soon.

flybird145
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Re: Vanguard municipal money market fund yield, almost 4%

Post by flybird145 » Wed Mar 25, 2020 10:19 am

I agree that rates will drop to near zero soon.
My understanding is the risk for muni funds is that the NAV for muni bond funds will go up if/when rates go down (and vice versa). But for money market, they will try to keep the NAV to 1. So really the worst that can happen is we buy money market fund, earn a high rate, rate goes down, and you move to regular money market?

I don't really get what the risk is, especially if fed is going to buy up bonds to keep price stable...

nalor511
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Re: Vanguard municipal money market fund yield, almost 4%

Post by nalor511 » Wed Mar 25, 2020 1:17 pm

flybird145 wrote:
Wed Mar 25, 2020 10:19 am
I agree that rates will drop to near zero soon.
My understanding is the risk for muni funds is that the NAV for muni bond funds will go up if/when rates go down (and vice versa). But for money market, they will try to keep the NAV to 1. So really the worst that can happen is we buy money market fund, earn a high rate, rate goes down, and you move to regular money market?

I don't really get what the risk is, especially if fed is going to buy up bonds to keep price stable...
It's a previous rate you're seeing, not live. So the risk is that you buy in, end up earning $0, and give up the opportunity cost you could have earned elsewhere. OR, something funky happens and the NAV goes down, and your investment loses money, and you want to get out but can't without locking that loss. Or something I didn't mention. Whether these things matter to you is, of course, up to you.

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Phineas J. Whoopee
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Re: Vanguard municipal money market fund yield, almost 4%

Post by Phineas J. Whoopee » Wed Mar 25, 2020 8:19 pm

The Fed is not attempting to protect buyers of money market mutual funds. It's attempting to keep the commercial paper and short-term municipal debt markets liquid. That was a problem during the 2007 - 2009 financial crisis. The Fed is trying to get ahead of it this time.

If money market fund investors are helped as a side effect that's fine, but it isn't the motivation.

PJW

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