Municipal money market fund yields still quite high but continuing to drift back down to earth

The federal tax-free Fidelity Municipal Money Market fund (FTEXX) reached a high 7-day yield of 5.77% two weeks ago, but is now back down to 2.77%, which is equivalent to a 4.26% taxable 7-day yield in the 35% tax bracket or 3.85% for the 28% tax bracket. The so-called "freeze" in so-called inter-bank lending continues its thawing process. In other words, the big bank bailout is making good progress at restoring the flow of credit.

I would note that a bunch of taxable money market funds are still showing up with much higher yields than the Fidelity Select Money Market fund (FSLXX) 7-day yield of 2.75% and the Fidelity Money Market fund (SPRXX) at 2.98%. According to Crane Data, there are at least four funds in the 3+% range and one at 4.75% that are supposedly taxable.

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 been a month since municipal money market funds leaped above 3%. And it has been over a week since the Federal Reserve slashed its target rate to 1.50%.

Seriously, we may in fact be entering a new financial "order" in which people actually think about actual risk and actual quality rather than the fantasy world of the credit boom years where just about everything was considered almost as safe as Treasury debt.

Note: If you are tempted to move your money to one of these high-yield money market funds, be aware that you will not be covered by the Treasury guarantee program for money market funds since that program only covers the balances you had in any given account and specific fund as on 9/19. That sucks, but it is reality.

See: Treasury's Temporary Guarantee Program for Money Market Funds including the FAQ.

-- Jack Krupansky