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. 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:

• 26-Jan-16 0.35%
• 08-Mar-16 0.40%
• 20-Sep-16 0.55%
• 14-Oct-16 0.60%

• 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%

• 14-Oct-16 0.30%

• 9-Feb-16 0.20%
• 12-Jul-16 0.33%
• 20-Sep-16 0.38%
• 14-Oct-16 0.46%

• 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%

• 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.

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.