Taxable Fund Yields Slide Below Tax-Exempt

In a novel twist, yields on tax-exempt money market mutual funds now are higher than yields on taxable money funds. But blink and you might miss them.

The average annualized yield on tax-exempt funds, which buy short-term IOUs from municipalities, was 1.13% in the seven days ended Monday, according to fund-tracker Imoneynet.com.

By contrast, the average yield on taxable money funds, which typically own IOUs of companies and government agencies, was 1.05% in the period.

Normally, the tax-exempt status of muni securities means their nominal yields are below those of taxable securities.

But some recent large IOU sales by states and municipalities have bolstered the supply of those securities relative to demand, said Peter Crane, managing editor of Imoneynet.com.

That has helped keep tax-free yields higher, even though all short-term yields have been sliding since the Federal Reserve cut its benchmark rate last week.

For someone in the 44% combined state and federal tax bracket in California, a 1.13% yield on a California muni fund equals a 2.02% taxable yield.

But Crane noted that tax-free money fund yields can be particularly volatile. He said he doesn’t expect the muni funds to yield more than taxable funds for more than a few weeks. For investors in lower tax brackets, that means it may not be worth contemplating a shift from taxable funds to tax-free funds.

Briefly

Fidelity Investments said it is reopening its Low-Priced Stock fund to new investors. The fund, which focuses on smaller stocks, was closed in spring because of a heavy cash inflow. The fund is down 8.2% year to date, compared with the 23.1% loss for the Standard & Poor’s 500 index.