Saturday, June 02, 2007

PayPal money market fund yield rises to 5.04% as of 6/2/2007

[Gentle reminder: I may suspend this weekly post in the near future, but I haven't decided for sure yet.]

Here are some recent money market mutual fund yields as of Saturday, June 2, 2007:

  • iMoneyNet average taxable money market fund 7-day yield remains at 4.72%
  • PayPal Money Market Fund 7-day yield rose from 5.03% to 5.04%
  • ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.47% to 4.46%
  • Fidelity Money Market Fund (SPRXX) 7-day yield remains at 5.01% ($25,000 minimum)
  • Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 4.97% to 4.98%
  • Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.45% to 4.47%
  • Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.48% to 3.45% or tax equivalent yield of 5.31% (down from 5.35%) for the 35% marginal tax bracket and 4.79% (down from 4.83%) for the 28% marginal tax bracket -- this may be the best rate that most of us can get for "core cash" in a checking-style account
  • Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.43% to 3.40% or tax equivalent yield of 5.23% (down from 5.28%) for the 35% marginal tax bracket and 4.72% (down from 4.76%) for the 28% marginal tax bracket
  • 4-week (1-month) T-bill investment rate fell from 5.00% to 4.96%
  • 13-week (3-month) T-bill investment rate rose from 4.91% to 4.92%
  • 26-week (6-month) T-bill investment rate remains at 5.01%
  • Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 3.74% (down from 4.52%), with a fixed rate of 1.30% (down from 1.40%) and a semiannual inflation rate of 1.21% (down from 1.55%) -- updated May 1, 2007, next semiannual update on November 1, 2007
  • Schwab Bank Investor Checking APY remains at 4.25%
  • Schwab Value Advantage Money Fund (SWVXX) 7-day yield remains at 4.90%
  • Schwab Investor Money Fund (SW2XX) 7-day yield remains at 4.73%
  • Charles Schwab 3-month CD APY remains at 5.10%
  • Charles Schwab 6-month CD APY rose from 5.11% to 5.16%
  • Charles Schwab 1-year CD APY rose from 5.11% to 5.15%
  • NetBank 6-month CD APY remains at 5.35%
  • NetBank 1-year CD APY remains at 5.35%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account or even your brokerage checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." The PayPal 7-day yield of 5.04% is equivalent to a bank APY of 5.16%.

Last week I wrote:

Possible red flag on PayPal: The interest credited to my PayPal account back in April seemed low. My rough calculation showed a simple rate of 4.95% (even factoring in that it was a 30-day month) rather than the weekly rates of over 5% that I saw quoted over that period. I will carefully examine my return this coming week to see if there is anything amiss.

This week, I am happy to report that the interest payment in my PayPal account came in at an annualized simple rate of 5.03%, right where I would have expected it. So, my red flag goes away. Maybe there was some sort of problem or maybe simply a lot of volatility or a spike in fund expenses that caused the yield to be significantly lower than the four weekly rates that I captured. I will in fact check the actual yield for the next couple of months to see if anything bizarre happens again.

4-week T-bills may once again be a fairly decent place for cash that you won't need for a month, since the new issue yield is now only slightly below the yield of PayPal and Fidelity Cash Reserves, but this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. Simply letting the T-bills automatically roll every four weeks will average out a lot of this volatility. Frankly, the extreme volatility with frequent low yields has turned me off to T-bills in favor of PayPal and Fidelity Cash Reserves, but we'll see how yields evolve over the coming months. My T-bills roll this coming week. I expect that I'll get a rate in the 4.85% to 5.05% range, with a midpoint estimate of 4.95%, which is slightly less than I am getting from Fidelity Cash Reserves (FDRXX) right now.

Check for the availability of high-rate CDs (5.00% APY to 5.45% APY for 6-month). Alas, there are frequently quite a few caveats, strings, restrictions, requirements, minimums, "introductory specials", and other gotchas, so read the fine print carefully. And some of these banks may have been involved in the subprime lending mess, so you might want to avoid them out of principle even if your principal is protected by the FDIC. CDs work great for some people, but horribly for others. I have no CDs since I do not have any free cash that I can afford to lock up with restrictions for even three months. But, that said, I am considering putting at least a little free cash in short-term CDs (three-month, six-month, or maybe even one-year), around the middle of 2007, especially if the Fed raises interest rates by a quarter-point in June or August. My current thinking is that although I can get a moderate increment of yield from a CD (e.g., from NetBank), the additional hassles don't seem worth the effort compared to the simplicity and flexibility I get with PayPal and Fidelity FDRXX. CDs would be worth the effort if I had a lot more cash, but I don't. And if you are up in the 35% tax bracket, a tax-free money market mutual fund (like FTEXX) will be a better deal.

Please note the disclaimer on Fidelity's web site for mutual funds:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money around a bit.

T-bills and the cash in your bank checking and savings accounts or bank CDs are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You are only assured of getting your full principle if your Treasury security is held until maturity (or Treasury "calls" the security or issues an offer to repurchase.)

I am not an investment adviser, so my opinions and the data presented here should not be considered as advice for where to invest your money. You should examine this and other available data before deciding how to invest your money. And, seriously, past returns should not be construed as a guarantee of future returns.

-- Jack Krupansky


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