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Money Markets Yielding Almost Nothing

Money isn't everything, at least to investors in money market funds. Yields are at all-time lows, and nearly a quarter of funds yield nothing at all.

The average money fund yielded an annualized 0.08 percent the week ended Aug. 4, the latest data from iMoneyNet, which tracks funds, shows. At that rate, a $10,000 investment would return 15 cents a week. But 275 taxable funds have no yield, 23 percent of the 1,180 funds iMoneyNet tracks. Most retail funds, which are sold directly to the public, reported below-average yields.

Retail funds that invest only in Treasury securities had an average yield of 0.03 percent. Prime retail funds, which can invest in a larger array of money market securities, averaged 0.06 percent. Yields are low because interest rates are low and because fund companies take most of the funds' return for expenses.

Money funds invest in money market securities, which are short-term, high-quality IOUs issued by the U.S. government, banks and corporations. They distribute their interest, minus expenses, to investors.

But the interest on money market securities is minuscule, thanks largely to the Federal Reserve, which has pushed its target for the key federal funds rate to between 0 and 0.25 percent.

Three-month Treasury bills, a typical money fund investment, yield 0.18 percent. Six-month T-bills yield 0.27 percent. And 90-day commercial paper, short-term IOUs issued by top-rated companies, yields about 0.34 percent.

The average money fund takes about 0.4 of a percentage point yearly for expenses, which means investors get little interest from the funds.

"They're taking more of the funds' yield to pay expenses than to pay investors," says Peter Crane, editor of newsletter Money Fund Intelligence.

Crane estimates that 80 percent of all funds are waiving some or all of their expenses to keep the funds' share prices from falling below $1 - breaking a buck, in money fund parlance. Money funds keep their share prices at $1 to emphasize their stability.

Some $27.5 billion fled money funds the week ended Aug. 5, says the Investment Company Institute, a fund industry trade group.

Some of that money is going to banks, which can offer any rate they want. The average one-year bank CD, for example, yields 1.88 percent.

But investors apparently feel that moving to a bank account is too much hassle for too little return. Assets in money funds have fallen to $3.6 trillion from $3.8 trillion at the end of 2008. Yet that's still nearly $500 billion more than at the start of 2008.

Many fund companies would welcome an exodus from money funds. Investors typically move money to another fund in the fund family, and most funds charge higher expenses than money funds, Crane says.

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