Municipal money market fund yields remain securely back down to earth

The federal tax-free Fidelity Municipal Money Market fund (FTEXX) reached a high 7-day yield of 5.77% back on October 1, 2008, but is now back down to 1.26%, which is equivalent to a 1.94% taxable 7-day yield in the 35% tax bracket or 1.75% for the 28% tax bracket. These yields are finally below the average taxable money market fund of 2.14%. The so-called "freeze" in so-called inter-bank lending appears to have completed its thawing process, at least in some areas. In other words, the big bank bailout is making good progress at restoring the flow of credit.

The Federal Reserve Commercial Paper Funding Facility (CPFF) kicked off on Monday, October 27, 2008. That should be having 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 1.00%, 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.

Note that GE Capital, GMAC, Ford, and Chrysler have registered for the CPFF program, so that may soon result in an increased flow in credit for GE, GM, et al customers. GE supposedly used CPFF on its first day.

-- Jack Krupansky