Subscribe to this BlogThe real paradox of thrift today
Vanguard this week announced changes to three of its money market funds: According to a press release on the company's website, Admiral Treasury Money Market and Treasury Money Market will merge (the two funds have been closed to new investors since late January).
In addition, Vanguard said it would close Federal Money Market to new investors, as of the end of day, June 2.
The changes are an attempt to shore up yield. With short-term Treasury rates at deep lows–the 1-year T-Bill pays out less than 0.5% today-money funds can barely cover expenses.Â
By merging two funds, Vanguard can cut costs; by closing funds to new investors, managers can avoid buying more Treasurys at ever lower yields.
The sad state of cash returns won't last forever. Still, I feel for anyone who relies on savings yields to help meet living costs. Though inflation was negative for the 12 months ending in April, some costs–like food–increased over the same time period. On top of the soaking we've all taken in the markets, today's ultra low yields are just one of the bear's many bitter aftershocks.
The only real recourse is to shop around. Vanguard is pointing investors to alternatives, such as Prime Money Market, now yielding 0.42%.
You can find a list of the highest yielding funds across the industry at iMoneyNet.com. For bank savings rates go to BankingMyWay.com and Bankrate.com.
Take heart: High savings yields come with their own problems, like inflation. As Reagan makes the point in his first inaugural address–at a time when savings accounts paid double-digit rates–the rapid rise of prices can do just as much to "penalize thrift."
How come in the down turn of the economy in the late 70's and early 80's money in the bank earned 10%, and now in this down turn of the economy today money in the bank earns 0? Is it just a tax on savers. If the interest on savings stays low for a long time, isn't that a sign that double digit inflation is coming in the near future? That will be a subtle form of tax also. The higher gas rises in price, the more tax the tax payer pays to support the out of control spenders in government.
It is amazing to me that people will put up with less than 1/2% yield (or less), when there are investment grade preferreds yielding over 10%. Sure, there is risk. But a diversified portfolio of utility, financial, and reit preferreds would still yield over 5%if one in twenty of them went bankrupt. Sitting on a yield of 1/2% in treasuries could also cause sales at a loss when the economy turns around. However bargains in preferred stocks will quickly disappear as market confidence returns the issues to prices at or above par.
If "…inflation was negative for the 12 months ending in April…", why did postal rates increase – TWICE? I believe the Federal Reserve is a pack of lairs.
Local banks are the best bet for safe savings rates. My local bank is offer 4% interest compounded monthly for savings uder $25k. You are required to have direct deposit or a bill pay and use ATM card certain number of times. But it has really been worth it for us.
In the late 70's you had inflation and banks had to compete for your money. Now, the banks are sopping up all the stimulus, it doesn't make it to main street, and there is deflation everywhere. Cash is now an investment with an intrinsic rate of return, no need to pay out on it, but on the other hand capital preservation has increased value in times like these. In any case, I agree with the other poster, yields are available if you can handle risk… Corp bonds have done nicely lately. Some banks have decent CD rates if you want to keep it simple. I'm highly-diversified, my portfolio lost 12.7% last year, back up 5% this year. Not bad, not spectacular, the key is I can sleep at night. Balance your risks!