Don’t look now, but the Federal Reserve has actually done something that will benefit the savers among us. To wit, money market mutual fund yields are going to rise a bit, thanks to the rate increase the Fed announced Wednesday.
And here’s a thought that might help make a small break for savers a bit bigger: If you’ve got a serious amount invested in regular money market funds — I’ll leave the definition of “serious” to you, because everyone’s situation is different — you might want to look at municipal money market funds, whose dividends are mostly or entirely tax-free.
Why mention muni money funds? Because while both regular and muni money funds will soon benefit from the Fed rate increase that everyone knows about, muni fund yields have been quietly benefitting from something far less well known: Securities and Exchange Commission regulations that went into effect in October.
Those regulations have driven many big institutional investors out of muni money funds, and have also driven out retail investors whose brokerage firms changed their “sweep accounts” to government funds from muni funds. Sweep accounts are the accounts from which cash is swept out to buy securities, and into which cash from securities sales, dividends and interest is swept in.
Retail government funds — which own only securities issued or guaranteed by the federal government — aren’t subject to the so-called “gates and fees” that the new SEC rules required retail muni funds (which buy state or local government IOUs) and retail prime funds (corporate IOUs) to adopt in October.
Those rules require retail and prime funds to limit redemptions, charge an exit fee or both if there’s a run on the funds by investors desperate to get their money out right now because they think the fund may collapse. The odds against such a run occurring are very high, but memories of the Reserve Fund’s collapse in 2008, which got caught owning Lehman securities when Lehman went bankrupt, still haunt the markets.
Adam Banker, a spokesman for Fidelity, the nation’s biggest money fund issuer, said, “We decided to offer only government money market funds, which are not subject to liquidity fees or redemption gates, for core sweep brokerage accounts” because surveys showed that Fidelity brokerage customers didn’t want to take even the slightest risk with their cash.
Assets in institutional muni funds have fallen more than 90 percent this year, to $4.6 billion as of Nov. 30 from $52 billion at year-end 2015, according to the Money Fund Intelligence newsletter. Peter Crane, who publishes the newsletter, said new rules require institutional muni funds to price shares to four digits rather than at the customary $1 a share, and institutions don’t want to have to deal with that.
Crane says that total muni money fund assets have fallen almost 50 percent this year — to $130 billion as of Nov. 30 from $252 billion.
But despite the severe shrinkage of muni fund assets, the short-term financial needs of state and local government entities was little changed. That resulted in higher rates on those borrowings, which translated into higher muni fund yields.
“Tax-exempt funds offer investors safety, high quality, liquidity and have attractive yields,” says Colleen Meehan, director of municipal money market fund strategies for Dreyfus, “and they’re attractive to people who pay serious income taxes.”
Meehan, of course, is talking her book, as they say on Wall Street. But after I met with her recently, I went home, compared the yields on taxable and tax-exempt money funds, and moved the sweep cash in my family’s taxable portfolios almost entirely into tax-free funds because I’m willing to take the risk (which I consider minuscule) of running into gate or fee problems. I moved the sweep cash in my retirement accounts, whose income is tax-free, into prime funds.
We savers are finally getting a teensy-weensy break from the Fed, which has penalized the prudent for years by holding down rates to bail out the imprudent and to presumably stimulate our economy. We’re heading back in the direction of normalcy. With all due respect to the don’t-raise-rates crowd, which includes friends of mine, it’s about time.