Money Funds Also Face Prospect of Low Returns
Just when a little spark has returned to money market mutual funds, things are about to get complicated.</br></br>For almost a year now, yields on these packages of short-lived securities such as Treasury bills and commercial paper have staged a nice, steady recovery toward respectability as the Federal Reserve has raised short-term interest rates.</br></br>The average yield on money funds, which scraped bottom at about 0.5 percent in April 2004, has climbed back to a 31/2-year high of 2.44 percent as of May 31 at last report by researchers iMoneynet in Westborough, Mass. It figures to go higher still, especially if on June 30 the Fed posts another quarter-point increase, to 3.25 percent, in the overnight bank rate.</br></br>Here's the rub: With each basis point, or hundredth of a percentage point, that money rates increase, they move closer to medium- and long-term rates that have been rising less sharply or not at all.</br></br>If Fed policymakers, who have raised short-term rates 25 basis points at each of their last nine scheduled meetings, were to keep doing that, the target rate would reach 4 percent by Nov. 1.