(Bloomberg Opinion) — If you thought high-yield savings accounts offered a juicy price for parking some cash, wait until you see what money-market funds are paying.
Yields on typically staid mutual funds, which invest mostly in short-term government bonds, rose 0.02% to 3.6% in early December, according to the CrainData 100 Money Market Fund Index. After this week’s Federal Reserve rate hike, money market fund yields are poised to move higher.
Some funds, such as the Allspring Money Market Fund, the Goldman Sachs Investor Money Market Fund and the JPMorgan Liquid Assets Money Market Fund, are offering yields closer to 4% or more.
That compares to an average fee of 3% for a high-yield online savings account. Although this is the highest in at least five years, banks have not exactly gone along with the Fed’s interest rate hike since May.
This is because the rates given by banks are influenced by factors other than their final decisions and the Fed’s actions. The big banks are still awash with pandemic money so depositors have yet to get out of their savings accounts. (The average for all banks was 0.24% as of Nov. 21, according to the Federal Deposit Insurance Corporation, but if you bank at Wells Fargo or Chase, you’re lucky to get 0.02%.)
Because online banks are more eager for customer deposits, they are more responsive to passing on the Fed’s rate hikes to their customers. Still, since money-market funds are mostly invested in Treasuries, their yields tend to be locked to the Fed rate. “Funds always give the market what the Fed gives them,” said Pete Crane, founder of Crane Data.
Money-market funds are used to hold short-term cash needs, such as for a down payment or emergency fund, or as a buffer between portfolio investments. Given the attractive yield of the fund, many investors should give it a second look.
Some already are. Money market funds hit $4.72 trillion in assets this month, the most since April — close to the $4.79 trillion peak recorded in May 2020, according to the Investment Company Institute.
Remember, money market funds are not the same as bank accounts. They are not FDIC insured, and there have been cases where assets have dropped below $1 a share, or “broke the money” and customers have not been able to get all of their money back.
In the year That’s less of an issue since regulatory reform in the wake of the 2008 financial crisis. Additionally, most money market funds hold only government bonds backed by the full faith and credit of the US government. In the past, distressed funds invested in short-term corporate bonds.
Still, for safety no. 1 Concerned investors should stick with money-market funds that invest only in government paper, not corporate bonds. The name of the fund usually describes what it invests in, but check the fund’s documents to be sure.
Of course, other cash-like investments also offer higher yields (relatively)—when you look at short-term sexier Treasury notes—but it can be harder to get your money than money-market funds. You can schedule short-term purchases at TreasuryDirect.gov and buy them for a limited period of time, but that requires a little more legwork than buying some money-market fund shares outright.
It’s the same story with certificates of deposit – they offer high yields, but investors have to commit to locking up their money for a certain period of time.
Beware of brokerage firms offering money market funds alongside their accounts as a place to “sweep” excess cash. DepositAccounts.com founder Ken Tumin says those funds rarely have good yields. If you have a large balance, you should consider switching to another money-market fund that offers a larger payout.
Keep track of payments though. Unlike a bank account or treasury account, a money market fund charges a fee to manage your money. When yields are so low, many mutual funds forgo most of their fees and are paying an average of 0.08% instead of the standard 0.27%, according to Crane data. But with higher yields, payments return to normal levels.
Finally, if you’re in a higher tax bracket, consider money-market funds that invest in municipal bonds, which provide interest that can be exempt from federal or state income taxes. Their yields aren’t as high as those of other money market funds right now, but Crain said it’s only a matter of time before they return to normal. They tend to see big outflows around the end of the year and April 15th, so when prices drop, production goes north.
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