Saturday, July 14, 2007

PayPal money market fund yield falls to 5.02% as of 7/14/2007

[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, July 14, 2007:

  • iMoneyNet average taxable money market fund 7-day yield rose from 4.68% to 4.70%
  • TIAA-CREF Money Market (TIRXX) 7-day yield rose from 4.94% to 5.04%
  • Vanguard Prime Money Market Fund (VMMXX) 7-day yield remains at 5.13%
  • Vanguard Federal Money Market Fund (VMFXX) 7-day yield fell from 5.08% to 5.07%
  • PayPal Money Market Fund 7-day yield fell from 5.06% to 5.02%
  • ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.46% to 4.47%
  • Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.01% to 4.99% ($25,000 minimum)
  • Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 4.99% to 4.98%
  • Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.47% to 4.45%
  • Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.34% to 3.27% or tax equivalent yield of 5.03% (down from 5.14%) for the 35% marginal tax bracket and 4.54% (down from 4.64%) 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 3.31% to 3.22% or tax equivalent yield of 4.95% (down from 5.09%) for the 35% marginal tax bracket and 4.47% (down from 4.60%) for the 28% marginal tax bracket
  • 4-week (1-month) T-bill investment rate fell from 4.76% to 4.75%
  • 13-week (3-month) T-bill investment rate rose from 4.93% to 4.96%
  • 26-week (6-month) T-bill investment rate rose from 5.01% to 5.06%
  • 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 rose from 4.91% to 4.92%
  • Schwab Investor Money Fund (SW2XX) 7-day yield rose from 4.74% to 4.75%
  • Charles Schwab 3-month CD APY fell from 5.15% to 5.11%
  • Charles Schwab 6-month CD APY remains at 5.16%
  • Charles Schwab 1-year CD APY remains at 5.20%
  • NetBank 6-month CD APY remains at 5.40%
  • NetBank 1-year CD APY remains at 5.40%

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 5.02% is equivalent to a bank APY of 5.14%.

No longer current: I wasn't aware of the high-yield TAA-CREF and Vanguard money market mutual funds before and I don't know much about them, but they are the highest yielding money market mutual funds out there for us retail investors, so I'll follow them and look into them a bit more closely. At this stage, it is still unclear if they really are available to all of us individual retail investors or if there are restrictions or fees that might reduce their attractiveness, but they do seem rather attractive, especially as an alternative to CDs.

Update: The TIAA-CREF yield recovered a bit last week after plunging the week before. Who knows whether that was a fluke or whether the original high yield was a fluke. Stay tuned.

4-week T-bills continue to not look as attractive a place for cash that you won't need for a month, since the new issue yield remains well 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. I believe that the low yield is due to turmoil in the bond market, with people dumping longer-term bonds and shifting money towards the shorter end of the Treasury yield curve. More money flowing in drives up the price, which lowers the yield.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.46% 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), in the Fall , especially if the Fed raises interest rates by a quarter-point in that timeframe. 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) may 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 or even an "indication" of future returns.

-- Jack Krupansky

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