Rates Down, Interest Up

March 7, 2008

The funny thing about money market funds is investor interest often climbs as the main perk - safe yield - falls. You'd think investors would leave money market funds when the yields plummet to below the inflation rate, but just like in 2002 and 2003 when investors were leaving stock mutual funds by the boatload and money market fund shares were selling like hotcakes (all while yields plummeted to around 1%), today money market funds are all the rage:

Total money market mutual fund assets rose by $22.64 billion to $3.451 trillion for the week, the Investment Company Institute said Thursday.

Assets of the nation's retail money market mutual funds rose by $3.66 billion in the latest week to $1.240 trillion.

Assets of taxable money market funds in the retail category rose by $1.30 billion to $948.19 billion for the week ended Wednesday, the Washington-based mutual fund trade group said. Tax-exempt fund assets rose by $2.37 billion to $292.29 billion.

Assets of institutional money market funds rose by $18.98 billion to $2.210 trillion for the same period. Among institutional funds, taxable money market fund assets rose by $16.34 billion to $2.032 trillion; assets of tax-exempt funds rose by $2.63 billion to $178.10 billion.

The seven-day average yield on money market mutual funds fell in the week ended Tuesday to 2.78 percent from 2.89 percent the previous week, said Money Fund Report, a service of iMoneyNet Inc. in Westboro, Mass."

Of course the real interest by many investors today is avoiding the slide in stocks and eventual (we've been waiting for years...) rise in interest rates that will sting bond holders. Money market funds deliver: investors avoid stock market downside.

Money market yields are perilously close to the dividend yield on the Dow. At just under 12,000, the Dow yields about 2.62%, the S&P 500 yields about 2.22%. Hopefully these investors will move into stocks when money market yields drop below stock yields once again. More likely they will wait until the market recovers 20%, dividend yields are lower, and money market funds yield over 5%, a time when money market funds are actually attractive again.