Why is the yield on my money market fund declining?

[soupcxan]

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?

 

[MasterBlaster]

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.

 

[SecondCor521]

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

 

[twaddle]

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/dom...nt/interest-rate/daily_treas_bill_rates.shtml

 

[al_bundy]

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.

 

[TexasGal]

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

 

[twaddle]

If they had subprime paper, then yields would have soared, not fallen. They hold 20% in treasuries, which is why the yield fell.

 

[AltaRed]

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?

 

[audreyh1]

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

 

[FinanceDude]

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..........

 

[CCdaCE]

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

 

[brewer12345]

Junk is very attractive right now. If you swing that way, this is a good time to add.

 

[barbarus]

Brewer, are you giving a gentle hint that the risk/reward ratio in junk maybe somewhat against the investor at this particular time?

 

[brewer12345]

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.