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Average money market fund yield falls below 1%

December 10, 2008 |  2:18 pm

The latest plunge in rates on short-term U.S. Treasury securities helped drag money market mutual fund yields below 1% this week for the first time since 2004.

The average taxable money fund’s seven-day annualized yield was 0.94% in the week ended Tuesday, down from 1.04% the previous week, according to IMoneyNet Inc. in Westborough, Mass.

With the crash in Treasury bill yields, the average retail money fund that buys primarily government securities sported an annualized yield of just 0.44% on Tuesday, down from 0.51% a week earlier, IMoneyNet said.

Money fund yields have been sinking fast over the last three months as the Federal Reserve has slashed its benchmark short-term interest rate to the current 1%, from 2% in late summer. The average taxable money fund yield has dropped from 1.91% in mid-September.

Fed policymakers meet again Tuesday and are expected to cut their key rate to at least 0.5%, and possibly to 0.25%.

But given how low yields already are on many of the short-term government, corporate and bank IOUs that money funds buy, the Fed is playing catch-up to the marketplace.

Still, any additional downward pressure on short-term yields will make things tougher for money funds, which hold $3.7 trillion of investors' cash. About two-thirds of funds already waive some portion of their management fees to bolster yields (a fund’s yield to shareholders is whatever it earns on the portfolio, minus fees).

"I think they’ll have to waive more expenses" to try to support yields, said Connie Bugbee, managing editor of IMoneyNet.

The funds still are paying more than they did at their lows in the first half of 2004, the last time the Fed’s rate was 1%. Average money fund yields bottomed at about 0.5% in 2004.

That just tells you there’s farther to fall.

-- Tom Petruno

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