<p>So glad to see this thread as I’ve been anguishing as I watch my Vanguard Treasury account balance. crescent22, how does one invest in a municipal money market fund (pardon the ignorance)?</p>
<p>Municipal money market fund - You need to have a brokerage account, then you can buy it like any mutual fund except that the five-letter tickers have 2 x’s, not 1 at the end. Now there are limitations that may make it untenable for some people here - an individual brokerage often only let you buy their money market funds - the Fidelity ones have excellent yield thanks to their low fees and scale; the e-trade/JPMorgan ones I found have been poor.</p>
<p>Also, you have to be in a high-enough tax bracket to make it worthwhile - at least 28%, since the whole point is that you save on state/federal taxes. Your yield is lower than similar taxable money market funds but not so much lower that you lose out after you would pay taxes on the taxable fund.</p>
<p>This FDIC-insured safety net is I think wildly overrated in today’s situation. Obviously there’s 80% chance nothing bad happens, but in a really bad scenario, the FDIC insurance would be overwhelmed if enough banks go under - they don’t have enough money to pay all claims and you would have to deal with the claims process which would be elongated relative to all other past experiences. </p>
<p>Another reason I prefer municipal money markets is the likelihood that if you do lose money, it’s only a few cents on the dollar - like the Reserve Fund only lost 3c- the shortness of all the maturities (mostly < 90 days) significantly enhances the creditworthiness of the instrument. So I’d rather have cash parked at cities/states for short periods than at banks for longer periods. The default chance (however still unlikely) feels larger at the latter than the former. </p>
<p>Now, you can take the risk and get your 2% at Emigrant- you’ll probably be better off especially if you don’t need the money anytime soon, but I’d look at Emigrant’s balance sheet first - I would not rely on this FDIC-insurance mirage- far too many people already are. The government would readily let Emigrant fail first and send depositors into FDIC rather than Bank of America.</p>
<p>I have a significant amount of my money in a similar money market fund at Schwab. This fund only invests in short term US Treasury securities. After fees the yield is now close to zero. I am buying actual treasury bills myself. They yield less than 1%, but there is actually the potential for capital gains if the rates drop even lower before maturity. I am also in the process of opening a savings account with Schwab (a new bank product for them) that will pay a whopping 2%.</p>
<p>Also, everyone should understand the difference between a money market fund, which is a fund not operated by a bank and is not fdic insured, </p>
<p>and a bank account that the bank has named “money market plus” or “money market saving” or “money market checking” which is a bank account and probably is fdic insured.</p>
<p>A money market mutual fund could be invested solely in US Treasuries (the name would reflect that), but at the other extreme could be invested in short term but relatively unsafe assets, so you really have to do your homework on money market mutual funds.</p>
<p>You don’t have to have a brokerage account to buy a municipal money market fund. With a minimum investment of $3,000 or so, Vanguard, Fidelity, TRowe Price or any number of other mutual fund companies will be glad to open a mutual fund account for you. These types of funds are often called “Tax-Exempt,” because interest/dividends are exempt from Federal income tax. As crescent22 points out, you need to consider your marginal tax rate to understand whether or not a “tax-exempt” money market fund makes sense for you.</p>
<p>Good point, dadx3 - never done it that way so I didn’t think of it - but it can be done that way.</p>
<p>We’re not talking about much here - the largest money market fund (or mutual fund of any kind) on the planet is Fidelity Cash Reserves (FDRXX) and it yields only 0.95% with a significant scale advantage that allows it to charge a tiny fee. That’s taxable but it’s diversified - you’d have to have a massive bank failure for this one to break the buck.</p>
<p>When a government agency insures something, there is always money to “pay out” because the government can always “print” more money.</p>
<p>You don’t think the enormous “bail-out” dispersals have been funded by raising taxes and selling t-bills to China do you? China isn’t buying and taxes are generally being cut. The government is creating the money out of nothing via its Federal Reserve (not actually a government agency) relationship.</p>
<p>U.S. money is the creation of the U.S. government. The nice statement of currency value is that it is backed by the “full faith and credit of the U.S. government”. The realistic basis of value is “we will shoot you in the head if you don’t take our fiat currency for hard goods”.</p>
<p>BigG! Shhhhhhh! Did you see Bernanke on 60 Minutes last night? I almost fell on the floor when he said what the Fed was doing, (sort of, kind of but not exactly) was printing money! I’m like, OMG! Dont TELL people that!! </p>
<p>Crescent22, Fidelity Cash Reserves is probably too big to fail, but honestly do you know what they invest in to make a statement that “a massive bank failure” would be needed for that fund to break the buck? Take a peak at their prospectus and let me know what their short term investments look like.</p>
<p>They don’t even have the expense of printing. The money is made to appear magically as computer entries to account data files.</p>
<p>The good thing about the coming hyperinflation is that China will have to finance part of the recovery expenditures through decreased real value of their T-Bills. They realize this and are grumbling about it.</p>
<p>I suppose a bunch of little banks imploding without a big one going under would cause this fund to break the buck. There is 40%+ exposure to foreign banks issuing US short-term debt (Yankee CDs or repos). They have not listed their Investments since last fall but then they did have as much as 3-3.5% exposure to single banks like Paribas and Rabobank. </p>
<p>I’ve stuck with the municipal money market funds despite that their yields tax-effected are below Cash Reserves’ over the short-term. It feels like a state/regional authority (or mass of them) is less likely to default than a bunch of levered commercial banks.</p>
<p>But I stand by the prior statement I would not have a chunk of cash (a large % of total cash) in 1 bank’s CDs.</p>