Yields Drop on Taxable Money Funds

Yields on taxable money-market mutual funds reached their lowest point in more than three years this week and will likely fall further in coming weeks.

However, if the Federal Reserve starts boosting interest rates to thwart inflation, yields could start climbing again.

The average weekly yield on taxable money funds dropped to 1.92% from 1.95%, according to iMoneyNet's weekly Money Fund Report. Tax-free and municipal fund yields tumbled nearly a half-point to 1.52% from 1.91%.

Such funds are generally bought for the safety and liquidity of a savings account, but with better yields. When the stock market is shaky -- as it is now, with the Dow down 5% this year and off 12% since its high in October -- more investors park their cash in money market funds until the outlook is sunnier. Total money market mutual fund assets are still hovering near the record of $3.49 trillion set last month.

Still, yields are generally linked to the intended federal funds rate, which was slashed to 2% from 2.25% in late April. The weekly yield on taxable money market funds was 2.01% on April 29 and has dropped ever since.

Yields generally float down to about half a percentage point below the Fed rate, to account for the fees that fund managers receive, says Connie Bugbee, managing editor of iMoneyNet. It usually takes five to six weeks for yields to stop moving in relation to the Fed's moves.

"The yields still have a little ways to go down," says Bugbee, who predicts they will settle around 1.5% if the Fed halts its rate-cutting campaign.

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