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Money fund yields keep falling, but cash stays put

February 27, 2009 |  6:00 am

How low do money market mutual fund yields have go before investors decide it's time to move that mountain of cash somewhere else?

If there’s some magic number, we apparently aren’t there yet -- even though yields are plumbing new depths.

The average annualized yield on taxable money funds slid to 0.33% this week, a new all-time low and down from 0.37% the previous week, according to iMoneyNet Inc.

Since the start of the year, assets of taxable money funds have risen a net $71 million, to $3.34 trillion, despite the continuing decline in yields that reflects the Federal Reserve's policy of maintaining rock-bottom short-term interest rates for the battered economy.

Moneyfundyieldsfeb25_3

The Fed's policy has in turn depressed yields on the short-term government, corporate and municipal IOUs that money funds buy.

Investors' willingness to stay in money funds at these tiny yields is one measure of the level of fear out there: Earning virtually no return is just fine with many people, as long as their principal is safe.

And money funds now offer the kind of safety that used to be reserved for banks. Last fall, as the credit crisis exploded, the Treasury allowed money funds to buy federal insurance to cover all assets investors had in the funds as of Sept. 19. All major fund companies are participating in the plan.

Money fund assets have long been fairly "sticky," in any case: Much of what goes into the funds tends to stay there, because it's cash that individual and institutional investors never expect to shift into longer-term (i.e., riskier) securities.

Still, investors could do a lot better than the current average money fund yield of 0.33% and still be safe. The average three-month certificate of deposit yield at banks is 1.11%, according to rate-tracker Informa Research Services. The average six-month CD yield is 1.49%. Federal deposit insurance now covers up to $250,000 per depositor per bank.

I'm sure inertia is a strong force keeping people in money funds now. But if every dollar of interest income matters in these difficult times, you can earn much more in short-term CDs than in most money funds. And with yields still falling on money funds and on CDs, the longer you stay put, the more income you'll forfeit.

-- Tom Petruno

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