Municipal money market fund yields remain sky-high

Tax-free municipal money market mutual funds have traditionally paid fairly lousy yields since they were priced for the highest tax bracket and even then were rarely competitive with taxable money market funds, but now the world has been turned upside down. The Fidelity Select Money Market fund (FSLXX), currently #2 on the Crane Data Top-Yielding Individual Money Funds list, currently has a 7-day yield of 2.61%, but the federal tax-free Fidelity Municipal Money Market fund (FTEXX) now has a 7-day yield of 5.57%. A month ago that same tax-free fund was yielding around 1.65%.

A 7-day field of 5.57% federal tax-free is equivalent to 8.20% taxable in the 35% tax bracket or 7.11% for the 28% tax bracket. When was the last time we saw money market fund yields like that?

Why the huge spike in yield? Probably simply because of the massive redemptions from money market funds last week which resulted in a buyers market for the very short-term tax-free securities that municipal money market funds buy and a lower price means a higher yield.

Now, why these yield spikes are occurring for tax-free funds and not for taxable funds is somewhat a mystery, but is probably simply related to differences in how the municipal market works. Or, maybe some of the old ARS securities have finally been repackaged to be acceptable for money market funds and that caused the glut.

The $64 billion question is how long this pricing anomaly will continue or whether in fact this is part of "the new world financial order." It has mean two weeks since municipal money market funds leaped above 3%.

-- Jack Krupansky