Mutual Funds / Managed Investing: Shopping for Money-Market Fund Yields
Some curious things are happening with money-market fund yields.</br></br>Usually, yields are bunched so closely together that only the fussiest of investors will do much comparison shopping. But in the week ended Dec. 8, the highest yielding taxable money fund offered 7.33%, compared with a 4.02% return from the lowest-yielding fund, which limits itself to Treasury securities, according to Donoghue's Moneyletter, an investment newsletter that tracks mutual funds.</br></br>The yield discrepancy can be explained in part by volatile market conditions around the time of the October stock market crash. Ian MacKinnon, head of the fixed-income group of the Vanguard Group of Valley Forge, Pa., says that at that time, the rates offered on Treasury bills swung by more than 2.5 percentage points. And on bank certificates of deposit, he says, "there was only a few days difference between a 9% and a 7%."</br></br>So the big question was whether money-fund managers locked in the high rates available before Oct. 19, or were forced to settle for lower rates afterward, when the Federal Reserve eased credit to help calm financial markets. Managers who "happened to deploy assets at 7.20%, not 4.50%" are still benefiting from investment decisions made in October, Mr. MacKinnon says.</br></br>Another reason for the discrepancy is fund manager's widely varying bets on interest-rate direction. Some, expecting a rise in interest rates, are parking money in relatively lower-yielding overnight repurchase agreements so they'll have it available when yields are more enticing.