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Over the weekend, I was poking around the Vanguard website when I ran across this little tidbit of information… The Vanguard Tax Exempt Money Market Fund (VMSXX) is currently yielding 4.53% (as of 10/13/2008). On top of that, it’s exempt from federal income tax. Thus, assuming that you’re in the 30% tax bracket, that’s the equivalent of a 6.47% yield (i.e., 4.53%/0.70 = 6.47%).
Why such a high rate?
According to Vanguard:
The yields of Vanguard’s municipal money market funds have risen dramatically in recent days. In a reversal of the usual relationship between yields of municipal and taxable money market funds, the yields of Vanguard Tax-Exempt Money Market Fund and similar state-specific funds have risen far above those of taxable funds, including Vanguard Prime, Federal, and Treasury Money Market Funds.
The unusual situation is being caused by current conditions in the short-term debt market. Many firms that help create and market short-term municipal securities for state and local governments are finding they need to boost yields to create greater demand for these securities. As a result, securities with extremely short maturitiesâ€”including those that mature in one day or one weekâ€”are being offered at exceptionally attractive yields.
As part of their normal operations, Vanguard’s tax-exempt money market funds purchase these kinds of short-term securities every day, causing the funds’ yields to move in step with the yields being offered in the marketplace.
While this is an incredibly attractive rate, it’s important to keep in mind that money market mutual funds aren’t typically insured against losses. Yes, Vanguard is participating in the U.S. Treasury money market fund insurance program, but that applies only to funds that were already in place as of September 19th, 2008. While fund companies strive to maintain a price of $1/share, there are no guarantees.