Move part of emergency fund from MM to short-term munis?

[soupcxan]

We're a young married couple (no kids) who keeps about $5k in our checking account and $30k currently in the Vanguard tax-exempt money market (VMSXX), yielding 1.7%. Granted, it's tax free, but that's pretty dismal. This money is for emergencies, if there was a job loss or major unexpected expense. Today I looked at the Vanguard limited-term tax exempt bond fund (VMLTX) and it is yielding about 3.2%, almost double, and I am wondering if I should move half the money-market funds into the limited-term fund to chase some yield. The money-market yield has really declined this year, and I feel like it's dead money. Any other thoughts?

The limited-term fund has only a 2.5 year duration. 85% of its bonds are AAA/AA, 10% is A, and the remaining 5% is BBB. So it seems like limited credit and rate risk. According to Yahoo Finance, the worst year in it's 20-year history was 1994 when it only earned 0.07% (no losing years to date).

 

[d]

i've held portions of my emergency fund in short/intermediate term funds, and would been burned on more than one occassion had i needed to access the $...

 

[CitricAcid]

It depends on the state of the U.S economy coming up and the inflation numbers. Generally, in times of high inflation, bonds do poorly as they do not update and reflect the rates of capital available to firms quickly, as well as raising interest rates by the Fed in response to inflation kills bond prices. It is only a personal reflection now, but bond funds wouldn't be where I would park my money in right now. I would definitely put my money in the bond fund over the MM fund, but if these were only for an emergency, what is wrong with putting the money in a broad index fund or something similar?

 

[Art G]

Am I too late with an opinion?
Run, do not walk, from limited maturity bond funds. I've yet to find the right environment for them and some of my biggest (and I mean BIGGEST) losses have come from these products. It seems in dropping interest rate environments they go down because of future rates dropping, and in rising interest rate environments, they go down because of current holdings. JMO.

 

[bamsphd]

The limited-term fund has only a 2.5 year duration. 85% of its bonds are AAA/AA, 10% is A, and the remaining 5% is BBB. So it seems like limited credit and rate risk. According to Yahoo Finance, the worst year in it's 20-year history was 1994 when it only earned 0.07% (no losing years to date).

For short term float I use MM funds to keep my tax returns simple, for "emergency" funds I use short-term bond funds. So if I wanted Tax-Exempt from Vanguard I would probably use Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX) which has a 1.2 year duration instead of the limited-term fund.

I don't think you are taking on too much additional financial risk if you use the limited-term fund instead. However, I think you might then be subject to Vanguard's frequent-trading policy, which only explicitly exempts MM and ST bond funds. How much of a problem that will be depends on your personal definition of "Emergency Fund." From previous threads on this board, some people expect multiple "emergencies" a year, while others think one or two per lifetime would be rather high.

I would definitely not use an equity fund for my emergency cash. Unfortunately a not-FI but suddenly RE emergency is both more likely and more severe during a recession/depression with associated bear market.

 

[ziggy29]

I think the economic climate for these is deteriorating, as a lot of state and local governments are reeling from dropping tax revenue (especially where the housing bubble is popping the loudest), increased energy expenses and looming retiree health/pension obligations.

I would stick to solid issues that aren't in economically sick areas, and I would stick with general obligation bonds that are backed by the full taxing authority of the issuing jurisdiction.

Not sure I like them in an emergency fund, though. If you don't think you'd need more than $10K in any six month period, laddering CDs six months apart is about as adventurous as I get.

 

[OAG]

We keep a bit in HSBC MMA currently paying 3.5% (fully taxable). Seems to be a decent rate (although it is a bank and SLOW even with on-line ACH transfers). Linked to the other accounts it seems simple to just transfer money from very low rate accounts to HSBC and back when you need it.