Money market funds dip below 2%

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From Times staff writer Walter Hamilton:

Attention all who have fled the stock market: Don’t look to money market funds for relief.

The average yield on taxable money funds dipped below 2% this week –- to an anemic 1.95%, according to Money Fund Report, a unit of iMoneyNet of Westborough, Mass. That’s the lowest level since March 2005.

Rates have slumped so low, in fact, that yields on taxable funds have even fallen below those on tax-exempt funds -– a rarity that last occurred in January 2004.

And yields are likely to keep heading down for the next several weeks, predicted Connie Bugbee, Money Fund Report managing editor.

Money-fund rates closely track the interest-rate levels set by the Federal Reserve, and normally bottom out about 0.5% below the federal funds rate. With the funds rate at 2% currently, money funds could slide to 1.5% by early summer.

Investors in the past have typically stuck to money funds despite lackluster rates, Bugbee said, and may follow that pattern even more today.

Investors have watched those who ventured out in search of higher yields get burned during the credit crunch in money-fund alternatives such as auction-rate securities, bank-rate funds and ultra-short bond funds.

“Some people go hunting for a little bit more yield and we know what’s happened to some who have done that,” Bugbee said. “This year has awakened a lot of people and my hunch is fewer will leave money funds than we’ve seen in the past.”

Is there any way to get a better rates?

Depending on your tax bracket, consider moving to tax-free funds, Bugbee suggested.

Money & Co. blogger Tom Petruno is on vacation this week. He returns May 12.