Money market fund yields still high despite Fed rate cuts

One unfortunate side effect of Fed rate cuts is to push money market fund yields down. The good news is that money market fund yields have not yet declined to match even the September Fed rate cut. According to iMoneyNet, as of Tuesday (before the latest Fed rate cut) the average 7-day yield was 4.42% as compared to a yield of 4.69% (0.27% decline) the week before the half-point Fed rate cut on September 18, 2007. The Fidelity Money Market Fund 7-day yield as of Friday (after the latest Fed rate cut) was 4.91% as opposed to 5.13% (0.22% decline.)

There are two main reasons that money market fund rates haven't declined as fast as the Fed rate cuts: 1) existing investments in the fund portfolios continue to maintain their existing yields until they mature, and 2) new commercial paper yields have a higher credit spread due to anxiety about commercial paper in general.

I would continue to expect money market fund rates to drift downwards in the coming weeks and months, but I had expected that they would have been even lower by now. Further, there is no reliable way to forecast how the market for short-term commercial, and associated credit spreads, will evolve in the coming weeks and months.

Note: You can still get a 5.40% APY 6-month CD from Countrywide Bank. Sure, you have the taint of the Countrywide subprime mortage scandal, but the money is FDIC-insured up to $100,000 or $250,000 in an IRA.

I continue to stick with the Fidelity Money Market Fund (SPRXX) for my main "rainy day" cash since it is a solid combination of convenience, security, and decent yield. My "core" Fidelity account uses the Fidelity Municipal Money Market Fund (FTEXX) which had a 7-day tax-equivalent yield of 4.28% (for the 28% federal income tax bracket.)

-- Jack Krupansky