Municipal money market fund yields finally back down to earth

The federal tax-free Fidelity Municipal Money Market fund (FTEXX) reached a high 7-day yield of 5.77% three weeks ago, but is now back down to 1.87%, which is equivalent to a 2.88% taxable 7-day yield in the 35% tax bracket or 2.60% for the 28% tax bracket. These yields are still above the average taxable money market fund of 2.11%, but less than the Fidelity Select Money Market fund (FSLXX) at 2.91% and the Fidelity Money Market Fund (SPRXX) at 3.14%. 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.

Note: The Federal Reserve Commercial Paper Funding Facility (CPFF) kicks off on Monday, October 27, 2008. That should have a big impact on the commercial paper market which affects money market funds, but how that translates into yields on money market funds is anybody's guess at this stage. The bad news is that if everything works out, money market fund yields should dive down to much closer to the federal funds target rate of 1.50%, but I suspect that there will be enough lingering uncertainty in the money markets for the next few months to keep yields somewhat higher than that.

-- Jack Krupansky