Cash No Longer Trash

Mike Zaccardi

MONEY MARKET YIELDS are no longer zero. Far from it. With the Federal Reserve raising short-term interest rates by another 0.75 percentage point last week, investors can now park their savings in a safe money-market mutual fund and earn more than 2%.

If you look at Vanguard Federal Money Market Fund (symbol: VFMXX), you won’t see a seven-day SEC yield that’s that high—yet. But give it a few days. Right before the Fed’s move last week, Vanguard’s money market fund yielded 1.5%. Add 0.75 percentage point to that figure, and you’ll get a sense for where we’re headed.

For folks with accounts at Fidelity Investments, another option is Fidelity Money Market Fund (SPRXX). The last time I reviewed Fidelity’s policies, it doesn’t allow that fund to be a default core cash position. Instead, you must opt to purchase the fund’s shares, just like you would any other fund. That means there’s an extra step to get the fund’s higher yield, versus Fidelity Government Money Market Fund (SPAXX), which has a lower SEC yield but can be used as a default cash position. I stumbled across a Fidelity Institutional page that lists a “one-day” SEC yield of 1.96% for Fidelity Money Market Fund as of July 29.

Earlier this year, I suggested people consider a short-term Treasury bond fund for their emergency savings. At the time, the yields on those funds were attractive relative to bank money market accounts and online savings accounts. I took my own advice. As it turns out, I was early with that call. Rates rose through mid-June, leading to modest share-price declines among the Treasury funds I mentioned in March. But now, with Treasury note yields declining over the past seven weeks while the Fed hikes short-term rates, I decided to make a switch.

Late last week, I exchanged my emergency money, which had been sitting in Fidelity Short-Term Treasury Bond Index Fund (FUMBX), to Fidelity Money Market Fund. My plan now is to keep my cash in that money market fund through at least early 2023. That’s when traders see the Fed’s rate-raising campaign peaking in the 3.25% to 3.5% range. Thanks to the Fed’s actions and a Treasury yield curve that’s the most inverted it’s been since 2000, money-market mutual funds look like a relatively good deal—one that comes with little risk.

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