Taxable MMF now a better deal than muni MMF
Just a quick note on money market fund (MMF) yields. Ever since the two rate cuts last month, MMF yields have been dropping daily as the new rates get factored in.
When I checked this morning, the gross compounded yields, and the after-tax* yields for me, are as follows
- VG Prime MMF (VMMXX) : 4.13%, 2.35%
- VG Treasury MMF (VMPXX) : 3.30%, 2.15%
- VG CA Tax-Exempt MMF : 2.00%, 1.88%
- Fidelity Select MMF (FSLXX) : 4.06%, 2.26%
- Fidelity CA-AMT-free MMF (FSPXX) : 1.88%, 1.88%
- WaMu Online Savings (for comparison) : 4.25%, 2.37%
I had been keeping my cash in FSPXX for many months but now it appears that municipal MMFs are no longer offering the best after-tax yields.
From the table above, taxable MMFs are now offering the better deal. With the WaMu Online Savings acount, I can get almost 50 basis points (0.5%) more in after-tax yield if I shift the cash to WaMu.
However, since I am using Fidelity’s mySmartCash as my main checking account, I would still keep the cash with Fidelity. What I did this morning was to submit an online request to shift my entire holding in FSPXX to FSLXX. I would re-evalute the yield some time in the future and move back to FSPXX if needed.
* CA resident with federal tax bracket 28%, state tax bracket 9.3%, and subject to AMT tax rate 35%.
Stumble it!
February 12th, 2008 at 5:07 pm
My wells fargo PMA account won’t allow me to make any transactions (buy or sell) with VCTXX (vanguard CA tax-exempt MMF).
I called them a few days ago and they said Vanguard had put a hold on those funds for the time being.
I have no idea when they will release the hold. I’m planning on transferring BACK to Etrade. (oh the perils of rate-chasing)
February 12th, 2008 at 5:15 pm
thom,
Simon reported the same in the other POST.
What the hack is going on??
February 12th, 2008 at 5:27 pm
The guy on the phone said it was likely due to the current bond market volatility. I’d be curious to know if direct Vanguard customers are experiencing the same problem.
I’m no bond expert, but I’m kind of surprised at the turn of events for VCTXX especially viz-a-viz VCAIX, the intermediate-term CA tax-exempt bond fund, which is still offering a fine yield:
For VCTXX we’ve seen:
- yield falls dramatically
- amid greater bond market turmoil
- redemptions must have been greater than vanguard likes
- vanguard turns off redemptions
It surprises me that VCTXX, holding short-term bonds would experience greater trouble than VCAIX, holding intermediate-term bonds. VCAIX’s price and yield have held up fine through all this.
February 12th, 2008 at 6:43 pm
Perhaps this and the ARS auction failures are related… my hypothesis is that CA’s TE MMF might have experienced huge inflows from money flowing out of muni ARS, and thus the lock down. Anyone think if this is the reason?
February 12th, 2008 at 8:27 pm
I noticed the same yield shift too. I exchanged into FSLXX - Fidelity Select Money Market last week.
February 12th, 2008 at 9:06 pm
This is what i got in an email from WellsFargo re VCTXX. redemptions are ok, but not buys, its quite odd, given the big drop in yeild I’m thinking of switching to VG’s prime MMF.
VANGUARD PURCHASE RESTRICTIONS
At this time, Vanguard is no longer accepting any purchase orders for VCTXX from Wells Fargo Investments. This purchase restriction applies to initial and subsequent purchases. Vanguard is currently only permitting sell orders in this specific fund.
We have been made aware that due to the volatility of the municipal bond marketplace, Vanguard Funds has elected to take certain steps to restrict the purchases of certain Tax Free Money Market Funds.
We have no estimated timeframe as to when this situation may change. To the best of our knowledge, this action on the part of Vanguard was completed without any prior communication to our firm.
We hope this information is helpful.
February 12th, 2008 at 11:47 pm
I just put in my sell order for VCTXX over the phone. It does seem odd that they would allow sell’s but not buy’s. Either they are allowing the fund to drain or, as indexfundfan was hypothesizing, they are getting a ton of purchases from investors running from muni bond resets. I guess VCTXX is the next-closest alternative to a muni bond reset.
Wells Fargo’s customer service btw is freaking awesome. At least for PMA accounts!
February 26th, 2008 at 11:07 am
Here’s an article related to the above issue:
February 27th, 2008 at 3:43 pm
[…] two weeks ago, I noted that taxable MMFs have better after-tax yields than the tax-exempt versions, even for investors in the highest tax brackets. Today, a post on the Bogleheads forum seems to […]