Update on tax exempt MMF yields
Just 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 indicate that this yield anomaly is over.
The yield of the Vanguard CA tax-exempt MMF (VCTXX) has jumped 93 bps in one week from a low of 1.61% on 2/20 to 2.54% on 2/27. The link below can be used to compare the Vanguard CA tax-exempt MMF (VCTXX) and the Vanguard Prime MMF (VMMXX):
Yield history of VCTXX / VMMXX
My money should be going back into the tax-exempt versions tomorrow.
Stumble it!
February 28th, 2008 at 12:05 am
I’m not understanding why Tax-exempt MM was lower a couple of weeks ago and now it suddenly jumped back higher than taxable MM.
I’ve been reading that VRDNs (variable rate demand notes) have been the MOST RECENT asset class to beging to freeze up (in the aftermath of the Auction Rate Securities freeze-up).
My understanding is that tax-exempt MMs hold VRDNs, (at least Fidelity’s does, so I assume Vanguard’s do too). Maybe these funds hold a lot of VRDNs that are resetting on a weekly basis, and that could explain the jump in rates since a freeze-up in the VRDN market-at-large would cause rates to rise in general, even for the higher quality notes.
Some economic blogs are suggesting to stay in just Treasuries because a lot of MM funds hold “government agency” paper, as well as CDOs/CMOs that are of questionable value. I assume that the taxable funds are the ones that hold that sort of junk. At least I know that VUSXX holds 80% treasury’s, but it can hold up to 20% “agency” paper…I just HOPE the “agency” paper they’re holding is safe.
I’m also HOPING that the Vanguard tax exempt funds will be okay with regard to safety. The Annual Report for VNJXX (NJ tax excempt) claims that Vanguard has been paying attention to underlying credit quality which, if true, means it SHOULD be a safe place (and HOPEFULLY VCTXX has that same policy)
I still own some Muni ARS Resets…at least I know what I own, but I expect they will be called-bacl in the near future.
Jay
February 28th, 2008 at 12:37 am
Jay, thanks for reading my blog.
There was a related article on why muni MMF are volatile : Money Market Funds Get Volatile.
February 28th, 2008 at 10:17 am
I was about to login to Vanguard and make yet another MMF transfer … but then did the calcs and Prime is still a bit better than CA Tax Exempt for me. Whew…
Will keep an eye on the rates though. Quite the jump.
February 28th, 2008 at 9:24 pm
hey indexfundfan: did you notice that wells trade still isn’t allowing purchases of VCTXX?
this might push me into opening a vanguard account directly if this continues for long with no ETA.
February 29th, 2008 at 12:30 am
Hi thom, I am not aware that we still can’t buy VCTXX from WellsTrade. I don’t use VCTXX at WellsTrade because I don’t keep cash in the WellsTrade taxable account.
By the way, Wellstrade is apparently counting the 3rd party MMF transactions as using up one of the 100 free trade count. See my post today.