Vanguard Prime Money Market Fund (VMMXX) breaks 1.00 (% not $)

[TheTimeLord]

Just wanted to share my happiness that we have a profitable place to park cash again! Even though online banks are insured, I never felt comfortable dealing with them, and it was a pain to have yet another waiting period before transactions completed.

Where has everyone been placing cash for the last few years?

By profitable do you mean the 2% yield that you have to pay federal and state taxes on while the latest inflation figures are running 2.6%.

It's rising fast. 2.8% as I saw it on BLS website.

https://www.bls.gov/cpi/

CPI for all items rises 0.2% in May as gasoline and shelter indexes increase
06/12/2018

In May, the Consumer Price Index for All Urban Consumers increased 0.2 percent seasonally adjusted; rising 2.8 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy rose 0.2 percent in May (SA); up 2.2 percent over the year (NSA).

https://www.bls.gov/cpi/

Core CPI. A method for measuring core inflation. It is the consumer price index (CPI) excluding energy and food prices. ... This method has become the most widely used because food and energy prices can be very volatile, and this wide amount of movement would unfairly bias the measure of inflation.

http://www.businessdictionary.com/defin ... e-CPI.html

[TheTimeLord]

2% is profitable? If it was ~3% then I might agree.

What investments do you currently see as profitable?

whatever beats inflation, at least in my limited investment experience.

Does it have to be guaranteed to beat inflation, or likely to and if so how likely? Isn't the most profitable item the one with the greatest return? What if none of them out perform inflation, would you not prefer a 2% increase to a 5% loss? Since you seem to be suggesting putting money in VMMXX isn't a good idea, where should people be putting it?

"Since you seem to be suggesting putting money in VMMXX isn't a good idea, where should people be putting it?"

I am not suggesting that at all. I am just pointing out that 2% isn't exactly "profitable" given that inflation is higher than that, and I'd personally only use an investment vehicle like that for EF or something.

That's fine, then what investment vehicle would you use?

[kaeltor]

What investments do you currently see as profitable?

whatever beats inflation, at least in my limited investment experience.

Does it have to be guaranteed to beat inflation, or likely to and if so how likely? Isn't the most profitable item the one with the greatest return? What if none of them out perform inflation, would you not prefer a 2% increase to a 5% loss? Since you seem to be suggesting putting money in VMMXX isn't a good idea, where should people be putting it?

"Since you seem to be suggesting putting money in VMMXX isn't a good idea, where should people be putting it?"

I am not suggesting that at all. I am just pointing out that 2% isn't exactly "profitable" given that inflation is higher than that, and I'd personally only use an investment vehicle like that for EF or something.

That's fine, then what investment vehicle would you use?

Like I said, and this is of course completely personal choice, I'd only use high yield savings accounts or Money market accounts like VMMXX for 3-6 months expenses/emergency fund.

The rest of my money is going into my simple 3 fund portfolio (total US stock, total intl, and a little bit into total bond market) divided out between my 401K,RothIRA, taxable Brokerage.

of course, this is coming from a beginner into personal finance.

[whodidntante]

I agree with the other snarky comments that it's a losing investment.

[linenfort]

Where has everyone been placing cash for the last few years?

In T-Bills and short-term treasury notes.
I followed some threads here about corporate bonds and Prime aka your VMMXX.

I was excited about Prime, but then I saw this thread, Is it time to dump high yield savings for prime money market?
Suddenly, I lost my taste for Prime.

And yes, inflation is already at 2.8% according to the inflation calculator site.

[Doc]

Where has everyone been placing cash for the last few years?

Vanguard Ultra-Short-Term Bond Investor VUBFX : SEC Yield 2.32%, Historical price range 9.96-10.02.

I can deal with a 0.3% price swing over three years for an extra 30 bps in yield especially given the fact that the price swing is the result of the unprecedented Frd action recently which is not likely to continue for very long.

[pascalwager]

I was using the Synchrony Bank HY Savings Account and they provided good service and competitive interest, but I recently moved nearly all of my cash into the VG Treasury MM Fund to eliminate the state tax liability.

I may never use an online bank again, but if I did, I wouldn't hesitate to go back to Synchrony.

[tesuzuki2002]

Just wanted to share my happiness that we have a profitable place to park cash again! Even though online banks are insured, I never felt comfortable dealing with them, and it was a pain to have yet another waiting period before transactions completed.

Where has everyone been placing cash for the last few years?

My cash is parked in a 4% interest checking account.

But I'm starting to turn and just tired of having a mortgage. I'm paying about half of it off in the next 3 months. (Mainly because I can pay it with a credit card and earn the miles for free thru September.) The remaining half will be paid off in 2019.

[TheTimeLord]

Where has everyone been placing cash for the last few years?

Vanguard Ultra-Short-Term Bond Investor VUBFX : SEC Yield 2.32%, Historical price range 9.96-10.02.

I can deal with a 0.3% price swing over three years for an extra 30 bps in yield especially given the fact that the price swing is the result of the unprecedented Frd action recently which is not likely to continue for very long.

I will have to look into this fund. Thanks.

[pascalwager]

Where has everyone been placing cash for the last few years?

Vanguard Ultra-Short-Term Bond Investor VUBFX : SEC Yield 2.32%, Historical price range 9.96-10.02.

I can deal with a 0.3% price swing over three years for an extra 30 bps in yield especially given the fact that the price swing is the result of the unprecedented Frd action recently which is not likely to continue for very long.

Last I read, it's going to continue through all of 2018 and 2019.

[jebmke]

I move cash to equity; bonds or food depending on the situation.

[Doc]

Where has everyone been placing cash for the last few years?

Vanguard Ultra-Short-Term Bond Investor VUBFX : SEC Yield 2.32%, Historical price range 9.96-10.02.

I can deal with a 0.3% price swing over three years for an extra 30 bps in yield especially given the fact that the price swing is the result of the unprecedented Frd action recently which is not likely to continue for very long.

Last I read, it's going to continue through all of 2018 and 2019.

That's not very long.

Besides the duration is only a year and that's even "less long".

And you might even get a tax loss opportunity from your "cash".

"Last I read, it's going to continue through all of 2018 and 2019."

Read something this morning about the "bank discount rate" and the Federal funds rate not having the desired "spread" and the Fed might have to take action like selling more of their longer term securities and buying shorter term to prevent the yield curve from inverting. The same article said the futures market was predicting only a ~49% chance of two Fed funds rate this year not the two that "last I read" a whole week ago. This is all above my pay grade and I didn't bother to follow up on it. I'll try to find it again and post a reference.

Something I left out of the Ultra Short vs. MM comparison was the duration - about 60 days for the MM and 1 year for the ultrashort. So there is more risk for the ultra short but we knew that since the $10 price is not maintained.

[welderwannabe]

Just wanted to share my happiness that we have a profitable place to park cash again! Even though online banks are insured, I never felt comfortable dealing with them, and it was a pain to have yet another waiting period before transactions completed.

Where has everyone been placing cash for the last few years?

Tbills that I buy at auction, and Vanguard Municipal Money Market fund VMSXX.

Yes, both are currently losing to inflation however over the long haul TBills have generally kept up with inflation. I like keeping cash around. It makes me feel warm and fuzzy.

[Kevin M]

Year over year CPI increase for May 2018 was 2.8%, but that doesn't mean "inflation is running at 2.8%". Nor does it mean that "inflation is increasing fast". It is simply a snapshot of year over year inflation for one month.

The average of year over year inflation for the last 12 months was 2.15%. And it's not like inflation has been increasing steadily. YOY inflation in Feb 2017 was 2.74%, but it dropped as low as 1.63% in Jun 2017.

Although the general trend has been up for the last few years, that doesn't mean the trend will continue. Here is a chart of YOY CPI change for the last 10 years:



Based on breakeven inflation rates (TIPS yield minus nominal Treasury yield), market expectations for inflation going forward appear to be in the 2% ballpark, which also happens to be the Fed target. An expected return of 0% real isn't bad for no term risk. For a 1-year term, you can get about 0.4% real with a 1-year TIPS or 2.4% nominal with a 1-year CD (and maybe a little less with a 1-year Treasury, not factoring in the state tax exemption), so consistent with market expectations of about 2% inflation. So you have to at least take some term risk to have a shot at a positive real return.

I feel pretty good about 2% nominal for no term risk, i.e., for the portion of my portfolio for which I want the highest liquidity.

Kevin

[sabtastic]

Perhaps "profitable" was the wrong way to say it. "Reduction in loss" would be more accurate.

Anyway, we have been saving for a few years for a down payment, and it has been nothing but low yield savings accounts and CDs here. It has been a lost decade for cash. Sure was nice to see our retirement accounts grow, but down payment savings has not kept up with the rise in home prices.

and to linenfort, if vanguard's PMM goes belly up the financial world will be in such a bad place I don't think a down payment will be our biggest concern. FWIW, I still keep our emergency fund in a local credit union and I think it is a bad idea to use a MM in place of a checking account, but to each his own.

[pokebowl]

I was using the Synchrony Bank HY Savings Account and they provided good service and competitive interest, but I recently moved nearly all of my cash into the VG Treasury MM Fund to eliminate the state tax liability.

I may never use an online bank again, but if I did, I wouldn't hesitate to go back to Synchrony.

Not a bad fund at all. Very conservative fund, some would even argue safer than FDIC due to the underlying assets cutting out the middle man. Wish that fund would drop its initial investment minimum back to pre-2008 levels. 50k initial for non-grandfathered in folks is steep.

[Scooter57]

I had a lot of money in the Prime Money Market Fund in 2007-2008. I slept like a baby while many of my friends who were about to turn 60 were panicking. Now that I'm a decade older, that peace of mind is even more valuable.

The government-supplied inflation number may be very different from your PERSONAL inflation number if you own your home and don't do a lot of driing or buying of certain categories of consumer goods. Rising rents and new car prices aren't a huge issue for me as I am a happy "buy and hold" Honda customer who doesn't drive much. Taxes are a wash for us with the new tax law.

If inflation really heats up the MM fund may be the best place to have your money. I started investing in MM funds back when they were paying about 17% in the early 1980s. MM funds typically correlate well with inflation and adjust quickly.

Any retired person who has enough to retire comfortably migtht think long and hard about preserving capital rather than assming they will get a significantly positive return by investing in the market.

[linenfort]

Year over year CPI increase for May 2018 was 2.8%, but that doesn't mean "inflation is running at 2.8%". Nor does it mean that "inflation is increasing fast". It is simply a snapshot of year over year inflation for one month.

Important to remember.

I feel pretty good about 2% nominal for no term risk, i.e., for the portion of my portfolio for which I want the highest liquidity.

Six-month t-bills.

[Kevin M]

I feel pretty good about 2% nominal for no term risk, i.e., for the portion of my portfolio for which I want the highest liquidity.

Six-month t-bills.

Six-month T-bills are pretty good for me in taxable for part of the portion of my portfolio I want to expose to six months of term risk, but that's not no term risk, nor highest liquidity.

Yield of 6-month T-bill at last auction was 2.136%, which for me is taxable-equivalent yield (TEY) of 2.399%. If I were comparing to Prime MM at 2.02%, that would be a significant premium of about 38 basis points, or 76 bps/year for extending maturity by six months. Very steep yield curve out to six months with Prime MM as a benchmark.

However, I'm now moving cash to a savings account where I'm earning 2.26% APY (no longer available at this rate). Using this as my 0-year benchmark, the 6-month provides a much smaller yield premium of about 14 bps, or 28 bps/year. Not bad, but not nearly as good as when comparing to Prime MM.

The one-year Treasury looks a bit better, with last auction at 2.347%, which for me is TEY of 2.636%, which is 38 bps/year compared to savings account at 2.26%. Of course more term risk than the 6-month, but also more compensation for taking the extra term risk.

If starting from scratch, probably would be more interested in the 6-month, but I have a large quantity of taxable CDs maturing in about 3, 5 and 7 months, so these more than fill in the short-term rungs of my taxable fixed-income ladder.

Kevin

[pascalwager]

I agree with the other snarky comments that it's a losing investment.

Yes, but it's just a part of someone's portfolio--the two-month maturity, safest part. It provides a slug of safer money that currently loses about 1% to inflation. Do you replace it with bonds that are losing even more, or with risky stocks that might lose very much more? The answer may depend on one's age and working/retirement status.

[LadyGeek]

I merged sabtastic's post into here, which is a similar discussion. I also updated the first post.

The fund info is here: VMMXX - Vanguard Prime Money Market Fund

Yield is in the Overview tab, "Price and Yield" section. SEC yield is currently showing 2.02%.

Vanguard's definition of SEC yield:

A non-money market fund's SEC yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income as a percentage of its assets. A security's income, for the purposes of this calculation, is based on the current market yield to maturity (for bonds) or projected dividend yield (for stocks) of the fund's holdings over a trailing 30-day period. This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield.

The SEC yield for a money market fund is calculated by annualizing its daily income distributions for the previous 7 days.

[Kevin M]

I agree with the other snarky comments that it's a losing investment.

Yes, but it's just a part of someone's portfolio--the two-month maturity, safest part. It provides a slug of safer money that currently loses about 1% to inflation. Do you replace it with bonds that are losing even more, or with risky stocks that might lose very much more? The answer may depend on one's age and working/retirement status.

Part of the problem is using present tense.

Prime MM 1-year return as of 5/31/2018 was 1.35%, while intermediate-term Treasury 1-year return was -2.02%. Which was the losing investment? Inflation impacted both the same, but the bond fund obviously lost more both in nominal and real terms.

We don't know which will do better in nominal terms over the next year, and we don't know what inflation will be over the next year. Of course the expected return of the bond fund is higher, but the uncertainty of earning that return also is higher. The uncertainty of the 1-year real return for both is higher than that of a 1-year TIPS.

How much term risk and inflation risk each of us wants to take with a particular part of our portfolio is a personal decision.

Kevin

[mickeyd]

PMMF is a pretty solid place for your short-term cash. It seems to be increasing 2-3 bps weekly and is easily accessible. Lack of SGLI is not a problem as it has historically not "broken the buck."

**Acronym Correction...SGLI stands for servicemans group life insurance. What I was reaching for was FDIC/NCUA, not SGLI.**

[Doc]

PMMF is a pretty solid place for your short-term cash. It seems to be increasing 2-3 bps weekly and is easily accessible. Lack of SGLI is not a problem as it has historically not "broken the buck."

If something "breaks the buck" by a handful of basis points do we really care?

[LadyGeek]

If it's more than 1/2 of 1 cent (50 bps), the SEC cares. See: Updated Investor Bulletin: Focus on Money Market Funds

[whodidntante]

PMMF is a pretty solid place for your short-term cash. It seems to be increasing 2-3 bps weekly and is easily accessible. Lack of SGLI is not a problem as it has historically not "broken the buck."

If something "breaks the buck" by a handful of basis points do we really care?

I would. Not because I would pity the Vanguard Prime investors who lost money, but because it would mean something terrible and unexpected happened in our economy. Commercial paper is issued by companies with incredibly good credit at the time of issuance, and it's short-term, so you need a black swan in a hurry to trigger a default.

[sabtastic]

I would. Not because I would pity the Vanguard Prime investors who lost money, but because it would mean something terrible and unexpected happened in our economy. Commercial paper is issued by companies with incredibly good credit at the time of issuance, and it's short-term, so you need a black swan in a hurry to trigger a default.

+1

I assume, with the new SEC rules in place, having a failure of VMMXX would mean investors are pulling out funds despite the gates and fees, correct?

Suppose everyone who invested in VMMXX wanted to cash out all at once. Seems to me the rules are designed to make everyone sit tight, not panic, and the fund would pay out as the securities mature (i.e. liquidity is restored)?

[Engineer250]

Does anyone keep their emergency fund in this fund? I currently have my emergency fund at Capital One MM (1.6%). Even the federal MM at VG has a higher rate. I know I would lose FDIC, but maybe the move to get 2.0% and easier access to muni funds and treasuries would be worth it? Or should I stick with FDIC? I'd still probably have about one month's worth of expenses in my credit union savings earning practically nothing but being immediately available and FDIC. Just trying to figure out if I should finally give up on capital one and move the rest.

[BogleMelon]

Does anyone keep their emergency fund in this fund? I currently have my emergency fund at Capital One MM (1.6%). Even the federal MM at VG has a higher rate. I know I would lose FDIC, but maybe the move to get 2.0% and easier access to muni funds and treasuries would be worth it? Or should I stick with FDIC? I'd still probably have about one month's worth of expenses in my credit union savings earning practically nothing but being immediately available and FDIC. Just trying to figure out if I should finally give up on capital one and move the rest.

I personally moved my EF (around $30K) to there..

[gmaynardkrebs]

Does anyone keep their emergency fund in this fund? I currently have my emergency fund at Capital One MM (1.6%). Even the federal MM at VG has a higher rate. I know I would lose FDIC, but maybe the move to get 2.0% and easier access to muni funds and treasuries would be worth it? Or should I stick with FDIC? I'd still probably have about one month's worth of expenses in my credit union savings earning practically nothing but being immediately available and FDIC. Just trying to figure out if I should finally give up on capital one and move the rest.

I keep most of my emergency money in the Vanguard Treasury Fund, but i'd be totally comfortable with Prime or Federal MM. I had some money at CIT Bank (FDIC), but left because of the inconvenience, and the tax bite.

[mickeyd]

Does anyone keep their emergency fund in this fund?

I retain all of my cash reserves in PMMF now that the SEC Yield pays over most online savings accounts APY. I do not have an "emergency fund," but my cash reserves serves the same purpose.

[Engineer250]

I personally moved my EF (around $30K) to there..

I keep most of my emergency money in the Vanguard Treasury Fund, but i'd be totally comfortable with Prime or Federal MM. I had some money at CIT Bank (FDIC), but left because of the inconvenience, and the tax bite.

I retain all of my cash reserves in PMMF now that the SEC Yield pays over most online savings accounts APY. I do not have an "emergency fund," but my cash reserves serves the same purpose.

Thanks everyone. Your responses have been extremely helpful towards making me comfortable to move my EF to VG.

[Leif]

I was using the Synchrony Bank HY Savings Account and they provided good service and competitive interest, but I recently moved nearly all of my cash into the VG Treasury MM Fund to eliminate the state tax liability.

I may never use an online bank again, but if I did, I wouldn't hesitate to go back to Synchrony.

Not a bad fund at all. Very conservative fund, some would even argue safer than FDIC due to the underlying assets cutting out the middle man. Wish that fund would drop its initial investment minimum back to pre-2008 levels. 50k initial for non-grandfathered in folks is steep.

As an alternative to VG Treasury MM you can check out Vanguard Federal Money Market Fund, VMFXX. It has an ER of 0.11% and a min. investment of $3,000 (vs ER of 0.09% and min investment of $50,000 (initial) in the Treasury fund (VUSXX)). Their SEC yield track closely.

[UpperNwGuy]

Does anyone keep their emergency fund in this fund?

I retain all of my cash reserves in PMMF now that the SEC Yield pays over most online savings accounts APY. I do not have an "emergency fund," but my cash reserves serves the same purpose.

I do the same. No emergency fund, but cash reserves are now in Vanguard Prime Money Market.

[blaugranamd]

Does anyone keep their emergency fund in this fund?

I retain all of my cash reserves in PMMF now that the SEC Yield pays over most online savings accounts APY. I do not have an "emergency fund," but my cash reserves serves the same purpose.

I do the same. No emergency fund, but cash reserves are now in Vanguard Prime Money Market.

I did the same. I keep a small amount in my old savings account to keep it open and for overdraft protection on checking.

[vwgrrc]

VMMXX is at 2.23% (compounded) as of today. Going to move my cash from online saving to this fund. Hope there is a way to feed my payroll to Vanguard directly

[MotoTrojan]

Popular Direct has a 2.0% online savings account, FDIC insured. I'm loving it.

PNC is at 2.20%. I'll only be in that long enough to get my $300 bonus though.