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
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
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.
Lower rates make borrowing cheaper but spur inflation, which is now near 4%, the highest level in about two years. Higher prices combined with other strains on the consumer -- from housing woes to weak earnings and debt burdens -- could promise to force the
hand toward rate hikes.
For now, choosing the fund with a healthy yield can be tough. Still, there are gems hidden in the rough, according to Bugbee, and yields are nowhere near their historical low of 0.5% reached in August 2003. Some fund managers cut back on fees and expenses to offer more competitive rates, she adds: "A few years ago, you'd see some come out with new funds and charge nothing so you have the best yield around."
Here are the government retail, prime retail and tax-free retail money funds that offered the best yields last week, according to the Money Fund report. You can also find the best rates in your area using BankingMyWay's online
and find out more about the funds on iMoneyNet's
Top government retail funds
1. Fidelity US Govt Reserves k: 2.22%
2. CAT: Govt&Agen Secs/DWS Govt&AgenMF k: 2.2%
3. Dreyfus BASIC US Govt MMF k: 2.17%
4. JENNDRY/Dryden Govt SecTr/MM Ser/Z: 2.15%
5. Selected Daily Govt Fund/Cl D: 2.14%
Top prime-retail funds
1. Dreyfus MM Instr/MM Series k h: 2.82%
2. Dreyfus BASIC MMF k: 2.77%
3. Fidelity Select Money Market: 2.71%
4. Morgan Stanley ActiveAssets MT: 2.68%
5. Touchstone MMF/Cl A k: 2.68%
Top tax-free retail funds
1. Alpine Municipal MMF/Investor k: 2.47%
2. USAA Tax Exempt MMF: 2.26%
3. Dreyfus BASIC NJ Muni MMF k: 2.25%
4. USAA Tax Exempt CA MMF: 2.2%
5. Amer Century CA T-F MMF/Inv Class k: 2.12%