Money-Market Fund Investors Wait for Higher Yields

Many on Wall Street believe the Federal Reserve is planning to raise interest rates this year. But that day may not come soon enough for savers in money-market mutual funds.

The average seven-day simple annualized yield on taxable money-market funds fell to a record low of 1.32% this week from 1.34% last week, according to Imoneynet.com in Westborough, Mass.

Even as other market interest rates have risen from their lows early in the year, yields on money funds--which invest in the shortest-term corporate and government IOUs--continue to sink.

Many individual investors are earning yields below the Imoneynet.com average. That’s because the average includes funds that cater solely to institutions. Those funds tend to offer higher yields than funds for small investors.

The average yield on the main category of small-investor money funds fell to a record low of 1.16% this week from 1.17% last week, Imoneynet.com said.

Connie Bugbee, editor of Imoneynet’s Money Fund Report, said small-investor funds may be hampered in part because cash is leaving the funds, albeit at a slow rate. A cash outflow may preclude fund managers from taking advantage of new, higher-yielding securities in the market.

The total net outflow from small-investor funds has been $38.6 billion since early December, reducing assets to $660 billion as of this week, Bugbee said.

She also noted that investors now can earn a slightly higher interest rate in money funds that buy only government securities: The average rate on small-investor government funds is 1.17%, compared with 1.16% for diversified small-investor funds. Normally, the diversified funds pay more than government-only funds.

Investors can earn more if they’re willing to lock up their money for at least three months: The annualized yield on three-month Treasury bills now is 1.74%.