Average Money Market Yield Falls to a Record Low 2.96%

The yield on the average money market mutual fund has fallen below 3% for the first time--and is virtually certain to fall further.

IBC/Donoghue Inc., an Ashland, Mass.-based mutual-fund tracker, said the average simple yield paid by the 550 taxable money funds it follows dropped to 2.96% this week from 3.01% a week ago.

The new yield is the lowest ever recorded by IBC/Donoghue, which has followed the funds since their creation in the mid-1970s.

Money funds invest only in government, corporate and bank IOUs of very short terms, generally 90 days or less. So the funds’ yields have dwindled as the Federal Reserve has pushed short-term interest rates sharply lower since mid-1990 to help spur the economy.

Analysts say the current fund yield of 2.96% is likely to fall to about 2.7% in the weeks ahead as a result of the Fed’s move Friday to cut rates further.

Money funds began to soar in popularity in the late 1970s, as small investors sought a way to tap into rising market interest rates at a time when bank savings rates were strictly controlled by the federal government.

The yield heyday of the money funds was in 1981, when short-term interest rates hit their zenith. The all-time highest average fund yield was 17.32%, reached during the week of Jan. 28, 1981.

Despite their low yields today, taxable money funds still hold $499 billion in investor assets--four times the 1981 total.