Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Why is the yield on my money market fund declining?
Old 08-29-2007, 08:56 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Aug 2004
Location: Houston
Posts: 1,435
Why is the yield on my money market fund declining?

I've noticed that the yield on my Vanguard Prime MMF has declined by about 10 bps over the last few weeks - based on what we've been hearing about the tightening credit markets, widening spreads, and trouble issuing commercial paper (which makes up 22% of the fund) why isn't the yield going up? I would expect that with less liquidity in the market, companies would have to pay a higher rate to get investors to buy their CP. So what's up? Is the problem that the fund's duration is 55 days, so enough of the fund hasn't rolled-over to higher rate investments yet?
__________________

__________________
soupcxan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-29-2007, 09:28 AM   #2
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Well there are a few explanations.

1) There has been a rush to quality as investors dump more risky bonds. Money markets are by definition high quality paper. Supply and demand suggests that when the demand goes up the market will adjust. High demand means lower yields.

2) Some of the MM funds tried to spike their returns by holding some of those pesky Collateralized debt Obligations (ie Mortgage bonds). They were rated highly be the rating agencies but we know better now don't we. Your lower yield may reflect the repricing of those CDOs that have dropped in value.
__________________

__________________
MasterBlaster is offline   Reply With Quote
Old 08-29-2007, 09:28 AM   #3
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 2,401
It could be -- just guessing here -- that a lot of people have been afraid of the recent gyrations in the stock market and are moving their money into safer investments like the Vanguard fund you mention to "ride it out".

2Cor521
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is online now   Reply With Quote
Old 08-29-2007, 10:30 AM   #4
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
Short term yields on treasuries were crushed during the recent turmoil -- they hit an intraday low below 2%, but they're starting to recover now.

http://www.treasury.gov/offices/dome...ll_rates.shtml
__________________
twaddle is offline   Reply With Quote
Old 08-29-2007, 11:40 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 1,543
you have to look at the investments it holds. my 401k MM fund holds a lot of corporate paper. scanned through it and didn't see anything subprime related.
__________________
al_bundy is offline   Reply With Quote
Old 08-29-2007, 11:43 AM   #6
Recycles dryer sheets
TexasGal's Avatar
 
Join Date: Jul 2007
Posts: 229
I asked Vanguard if prime MM owned any subprime related crap and they said no. I have no idea whether to believe them or not . . . but at least I asked. There is probably a way they can legally say no while still being tied somehow to the mess.

TG
__________________
TexasGal is offline   Reply With Quote
Old 08-29-2007, 11:44 AM   #7
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
If they had subprime paper, then yields would have soared, not fallen. They hold 20% in treasuries, which is why the yield fell.
__________________
twaddle is offline   Reply With Quote
Old 08-29-2007, 01:24 PM   #8
Full time employment: Posting here.
 
Join Date: Feb 2004
Location: Okanagan Valley
Posts: 805
Just about any responsible MMF will be experiencing reduced yields due to the recent flight to safety. The math is simple. 80% of fund on highest quality paper at reduced yields (e.g. Treasuries) versus 20% of fund on less quality paper at equal or slightly higher yields equals lower overall yield.

I don't think decreased market value of riskier short term assets would be reflected in yield. Typically MMFs do not sell paper before maturity and if they did, then there would be capital loss issues come year end distributions. Has anyone ever received a capital gain (or return of capital) on a MMF distribution?
__________________
AltaRed is offline   Reply With Quote
Old 08-30-2007, 11:21 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,457
Vanguard has stated publicly that they avoided CDOs in their MM funds. I think you can believe them. The yield drop is probably because they are holding the highest quality short term paper, and everyone has been rushing into this stuff.

Audrey
__________________
audreyh1 is online now   Reply With Quote
Old 08-30-2007, 11:36 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by audreyh1 View Post
Vanguard has stated publicly that they avoided CDOs in their MM funds. I think you can believe them. The yield drop is probably because they are holding the highest quality short term paper, and everyone has been rushing into this stuff.
Audrey
The most likely scenario..........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 08-30-2007, 02:55 PM   #11
Full time employment: Posting here.
CCdaCE's Avatar
 
Join Date: Apr 2006
Posts: 887
Conversely, does that mean Junk Bond Yield is going to rise?

2 mos. ago, VG High Yield was 7.48
1 mo. ago, it was 8.16
Peak was 8.34 on 8/16.
Low was 6.9 in March

Today, it's down to 8.18.

Which way to aim now? I think the fear is overblown. But, I'm not putting my money where my mouth is.

-CC
__________________
"There's those thinkin' more or less, less is more, but if less is more, how you keepin' score?
It means for every point you make, your level drops. Kinda like you're startin' from the top..." "Society" - Eddie Vedder
CCdaCE is offline   Reply With Quote
Old 08-30-2007, 02:59 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Junk is very attractive right now. If you swing that way, this is a good time to add.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 08-30-2007, 05:39 PM   #13
Recycles dryer sheets
barbarus's Avatar
 
Join Date: Aug 2007
Posts: 433
Brewer, are you giving a gentle hint that the risk/reward ratio in junk maybe somewhat against the investor at this particular time?
__________________
barbarus is offline   Reply With Quote
Old 08-31-2007, 06:40 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by barbarus View Post
Brewer, are you giving a gentle hint that the risk/reward ratio in junk maybe somewhat against the investor at this particular time?
No. I am saying that the risk adjusted return on junk right now is VERY attractive.
__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
The Scoop on High Yield Bonds Ted FIRE and Money 9 12-04-2003 01:03 PM
How to locate a no fee Money Market fund Natalie Other topics 1 08-04-2003 07:50 AM
Money market in 401K Bill FIRE and Money 2 05-31-2003 08:15 AM

 

 
All times are GMT -6. The time now is 03:59 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.