For short-term cash, T-bills may be worth another look

Can’t stand that paltry yield you’re earning on your money market mutual fund, but you want to keep your cash safe? Maybe it’s time to consider U.S. Treasury bills.

While the average annualized yield on taxable money funds has slumped to 1.95% this week from 2.73% in mid-March (according to the Money Fund Report), three- and six-month T-bill yields have surged in the same period.

The three-month T-bill now pays about 1.83%, up from a low of 0.57% in mid-March. The six-month T-bill yield, about 1.87% now, is up from a low of 1.19% in mid-March.

Although T-bill yields still are below the average money fund yield, note that Treasury interest is exempt from state income tax. In high-tax California, that may make T-bills a better deal now, compared with money funds, for higher-income investors. (Money fund and bank interest is subject to federal and state income tax; Treasury interest is subject only to federal tax.)

T-bill yields were severely depressed in mid-March as people rushed into government paper amid the financial panic of that period. Yields have rebounded as investors’ fear level has receded.

As for money fund yields, they’re likely to continue drifting lower, says Connie Bugbee, managing editor of Money Fund Report. If the Federal Reserve keeps its benchmark short-term rate at 2% for the time being, as expected, the average money fund yield probably will bottom around 1.5%, Bugbee says.

Bank savings certificates are always another option. The average three-month CD yield is 1.89% currently, according to Informa Research Services. The average six-month CD yield is 2.21%. But you can find better yields by shopping around. Try www.bankrate.com. Tax-free municipal money market funds are another idea (current average yield: 1.91%) though yields on those funds are notoriously volatile.