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New Money Market Fund Rules Affect Safety and Yields


New rules for money market funds that take effect today (October 14) will fundamentally change the way money market funds operate. The new rules are intended to prevent runs on money market funds like what was seen in the 2008 financial crisis. These rules only affect money market funds (MMFs) which are mutual funds available from brokerage firms.They don’t affect any deposit accounts including money market accounts which are essentially the same as savings accounts.

The most important change for individual retail investors is that prime and municipal money market funds may impose redemption fees or suspend redemptions during times of crisis.

The most important change for individual retail investors is that prime and municipal money market funds may impose redemption fees or suspend redemptions during times of crisis. Prime funds mostly invest in short-term corporate debt while municipal funds invest in municipal debt.

Another change primarily affects only institutional investors. Prime and municipal money market funds that allow institutional investors will be required to maintain a floating net asset value (NAV). This means that you could lose money when you sell if the NAV has fallen from the time you had purchased the fund.

U.S. government and Treasury money market funds are exempt from these new rules. A simple way for investors to avoid these new rules is to move their money into government money market funds. However, this might not be necessary since several brokerage firms have made this change for their investors. In December 2015, Fidelity’s Cash Reserves fund, the world’s largest money market fund, transitioned its investment strategy to become a government fund. It’s now called the Fidelity Government Cash Reserves.

Money Market Fund Yield Changes

These new rules have affected money market funds long before today. Yields on prime and municipal money market funds have risen considerably all year as investors have moved money out of these funds.

Every two weeks when I review the best savings, money market and checking account rates for the rate summary, I also review the yields of the popular Fidelity and Vanguard money market funds. These are listed at the bottom section of the summary under the title “Bank Account Alternatives”.

For many years since the Fed cut the Federal funds rate to near zero, these MMF yields have been at or close to 0.01%. After the Fed rate hike last December, these yields finally started to rise. Last January, the Vanguard Prime MMF yield had risen to 0.30% and the Fidelity MMF yield had risen to 0.13%. The yields of the municipal money market funds (Vanguard Tax-Exempt MMF and Fidelity Municipal MMF) remained at 0.01%.

While the Fed held steady, these MMF yields continued a slow rise this year. The lists below show how the yields have risen:

Vanguard Prime MMF Yields
  • 26-Jan-16 0.35%
  • 08-Mar-16 0.40%
  • 20-Sep-16 0.55%
  • 14-Oct-16 0.60%
Vanguard Tax-Exempt MMF Yields
  • 22-Mar-16 0.02%
  • 05-Apr-16 0.22%
  • 03-May-16 0.30%
  • 20-Sep-16 0.56%
  • 14-Oct-16 0.72%
Vanguard Federal MMF Yield
  • 14-Oct-16 0.30%
Fidelity MMF Yields
  • 9-Feb-16 0.20%
  • 12-Jul-16 0.33%
  • 20-Sep-16 0.38%
  • 14-Oct-16 0.46%
Fidelity Municipal MMF Yields
  • 05-Apr-16 0.02%
  • 14-Jun-16 0.07%
  • 09-Aug-16 0.12%
  • 20-Sep-16 0.23%
  • 14-Oct-16 0.42%
Fidelity Government Cash Reserves MMF Yield
  • 14-Oct-16 0.13%

You can see how the yields have changed for the prime and municipal funds as the time approached today’s date. It’s interesting to see how little effect last December’s Fed rate hike had on the municipal fund yields. It’s also interesting to see how high the municipal fund yields are now and how low the government fund yields are. It’s apparent that investors have moved their money out of prime and municipal money market funds and into government funds. According to this WSJ article:

Ahead of the new rules, cash has flowed briskly into money funds that invest in government securities. Assets under management at these government money funds increased to $2.11 trillion as of Wednesday, up 72% from $1.23 trillion on Jan. 6.

That movement of money is having an effect on yields. This might not last. As mentioned in the WSJ article, this movement of money may be temporary as investors wait for things to settle down.

Savings Accounts or Money Market Funds?

The reason why I include money market funds in my weekly summaries is that I want to make sure readers are aware of conservative alternatives to bank accounts. These alternatives are not FDIC-insured, but they are still considered conservative. Savers will need to decide if higher yields justify the additional risk to principal and accessibility.

With the new money market fund rules, prime and municipal money market funds have more accessibility risk. These funds may now impose redemption fees or suspend redemptions during times of crisis. Is this risk significant? You’ll have to decide about that.

MMF yields have risen this year, but internet savings accounts remain the best deal for both yield and safety.

The yields on prime and municipal MMFs are now at levels where they are somewhat close to internet savings account yields. This is especially the case for municipal MMFs which can be exempt from federal income tax.

The safer government MMFs still have yields that are well below internet savings account yields.

MMF yields have risen this year, but internet savings accounts remain the best deal for both yield and safety. Of course, you can’t be complacent with your internet savings account. Make sure to monitor the rates to ensure your bank is keeping the savings account competitive. Please consider using our bank alerts system to notify you when your bank changes the rates on your accounts.

Should Investors Hold Their Cash in Internet Savings Accounts?

MMFs are still useful for investors to hold cash between investments. If you’re making multiple trades per month, transferring your cash between your savings account to your brokerage MMF account may be an issue. First, federal regulation limits electronic withdrawals from savings accounts to no more than six per statement period. Banks and credit unions will often allow an occasional withdrawal that exceeds the limit, but a fee will be charged. Second, transfers between banks and brokerages typically require ACH transfers which can take one to three business days.

The transfer delay issue is one reason why investors may want to keep their cash in MMFs instead of savings accounts. One way around this issue is to use a brokerage that’s connected to an internet bank. Capital One 360 is one example. They advertise instant transfers between online Capital One Investing and 360 banking accounts. That allows investors to keep their cash in the 360 Money Market Account earning a 1% yield (as of 10/14/16) until the day they want to buy some investment like a stock, bond or mutual fund.

This benefit isn’t available at all brokerages that are connected to internet banks. For example, Charles Schwab Bank has a High Yield Investor Savings Account, but its current yield is only 0.10%. Charles Schwab Bank used to have competitive yields on its checking and savings accounts, but that ended a long time ago. Investors who use Schwab Brokerage have little to no yield benefit by keeping their cash in these bank accounts.

  |     |   Comment #1
All sound good, except for the rates, they are depressing and when you include inflation and taxes, they turn into negative returns. 
This is done to protect the banks in case of a financial crisis and the consumer is left with tiny returns. The Government need someone to buy the treasuries and who else will finance the national debt, the unwilling savers.
  |     |   Comment #2
MMF is not the same as MMA, most people use MMA's
  |     |   Comment #3
The possibilities of redemption fees or limited access to your money is something to consider with investing in these type of funds.  The rates have climbed above zero to near 1% this year.  I am wondering why the exit of money from these funds now since they dropped to near zero % back in 2009.  For over seven years, you would have thought that the outflow would have occurred much earlier.  I have invested in these type of funds and have not lost one cent with them.
  |     |   Comment #4
Vanguard changed my settlement account because of this change. I was no longer allowed to use my NY Tax Free MM as my settlement account. Had to go to to a US Federal MM.
  |     |   Comment #5
I think this whole thing is a drastic overreaction and that the concerns could have been addresses much more simply and consumer-friendly. MMFs were NEVER presented as something that could not go under or brake the $1 par value. They always warned the $1 par could be broken, and that that is a risk. And the drastically minimized risk by investing only short term. Finally, after many decades, a single fund went under in drastic circumstances. Only one.

With the $1 par value, any loses were taken from the yield, not from the par value. And iflosses weree more  than the yield, yes, you could lose principle, and that was the warning and notice about them -- that was always known and notified before you opened it. Now they make it as difficult as a stock fund to deal with,when they could have esimply made some standards of reserves and the like, as they do for banks, but otherwise leave the easy to use and safe structure intact.

You can go to the munnicipal or government funds, sure, but the reason you didn't do that in the first place is becuase they are notably lower yield. (At  the moment, that higher yield is probably a blip  until things settle down.) So, what they have done now is effectively reduce your yield, kind of a new version of (dang, I can't remember the Fed's name for its efforts to lower interest rates) accommodating lower interst rates for savers!

These things were designed to be a safer and less complex and easer alternative to stock of bond funds. But now they are being turned into something very similar  to the stock and bond funds. Gee, now when you use them as the settlement fund to a stock or bond fund purchase, you might actually lose some of your investment overnight as they pass through this account! That's insane!
  |     |   Comment #6
Not much choice with settlement funds One thing is if your with a big fund company they will probably back the money markets. They would have some major withdrawals from their funds. I don't keep much in my settlement account until I make a purchase. Not something I would lose sleep over. The government would probably restrict withdrawals from banks if one of the major banks failed.
  |     |   Comment #7
All of you missed the main reason for the change, it is the taxes. If a bank does not invest the MMF or MMA into the US treasury, they have to pay tax on the float.
It is done to start some payments on the national debt (at least to have some float) for the interest on the national debt. If you like to learn the truth, visit the SEC web site.
The FED is eager to start investing on the stock market themselves, because now they realize, they can never be paid back from the borrowers (the banks and the other institutions) they hold worthless paper as security.
All that QEs was just a scam and an experiment asked by the politicians to cover the huge deficits ran by this administration.
  |     |   Comment #8
Thanks, Ken. You do a wonderful job with your website.
  |     |   Comment #9
I'm sorry but I can get 1.26% in a money market account that is FDIC insured and 2% in CD's so why would anyone in their right mind accept a lower yield in a non FDIC insured investment? MMF's should be earning at least twice what a MMA does. If I'm going to invest I'll do it in high yield monthly paying dividend stocks which earn 5-25% APY. 
  |     |   Comment #10
MMF rates were twice the bank savings interest rates back in the early 1980s. Banks were crying foul that they could not compete with MMF rates.  Now with subprime fallout and Fed policy with QE and bank deregulation, the difference has gone up in smoke.

25% dividend?  Which companies?
  |     |   Comment #11
That is what I earned in MORL last year. It depends on your purchase price but 20% is easily achievable. It pays monthly but the dividend varies greatly from month to month the 25% is dividends received over a 1 year period. Some sites will not have accurate dividend information on this REIT because they calculate the annual dividend based on the most current payout which is incorrect for MORL. Back in the 80's I was earning 9% in my savings account and still beating these MMF's as I recall. Back then I used to have to go to the library and check rates in the WSJ and money magazine! Still I would trade all this new technology in a heartbeat to get those rates again. Remember compound interest? 

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