June 4, 2010

New regulations likely to add to money fund woes

In our March issue, we reported (subscriber's link) on new money-fund regulations advanced by the U.S. Securities and Exchange Commission.

Those regs took effect last week, and Marketwatch's Chuck Jaffe (right) says they're likely to make money-market funds — already scraping bottom on yields — even more unattractive to savers who are seeking yield as well as safety.

Under the new rules...money funds must hold more liquid assets and limit their investments to only the highest-quality securities. In addition, they must reduce the average maturity of the securities they hold.
Furthermore, retail or taxable money-market funds must now hold at least 10% of assets in cash or highly liquid securities — think Treasurys — that can be converted to cash within one day. At least 30% of a money fund's assets must be in cash or Treasurys that mature in 60 days or less, or that can be converted into cash within a week....

The top-yielding money market funds currently are generating almost nothing for shareholders, with the best individual money funds paying out less than 0.2% and the top tax-exempt funds generating about 0.25%, according to Crane Data, which tracks the money-fund business. If anything, the new rules will drive those rates even closer to zero....

[Meanwhile, t]he top-yielding bank savings accounts and interest-bearing checking accounts carry annual percentage rates four or five times higher, according to BankRate.com.

That may not seem like much difference, but every little bit counts. An investor with $100,000 in cash to park will earn about $3.50 per day in an online savings account paying 1.3%, but will earn just 35 cents per day on a money fund paying 0.13%. The returns are miserable in both cases, but the extra $1,150 — and the plus of having Federal Deposit Insurance Corp. protection — is worth leaving the money fund.

Jaffe concedes that the day may come when "the new safety measures...pay off and protect shareholders." But right now, by mandating a reduction in risk, the regulations will make it even more difficult for MMFs to climb out of the low-yield hole.

To learn more about various options for savers, visit SMI's Savings Accounts page.