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Investors are piling into money market funds at historic rates thanks to their juicy 5% yields. Yet the funds are not only attractive for their income, they are also less volatile than the bond market right now, which has been rocked as Treasury yields soar. Bond yields move inversely to prices. “Now it appears [5% yield] is here for the foreseeable future,” said Peter Crane, founder of Crane Data, a firm that tracks money markets. “You are seeing risk elsewhere, so money funds and cash — their biggest selling point is safety and preservation of principle.” Treasury yields jumped again on Friday, with the 10-year hitting a fresh 16-year high of 4.887%. The move came after stronger-than-expected jobs data was released, which fueled concerns that the Federal Reserve will keep rates higher for longer to combat inflation. Yields have since eased from that level. “With long-term yields at multi-year highs, bonds offer more income. Yet a march higher in yields can wipe that out: A roughly 0.5 percentage point rise in yields could drag on valuations enough to erase a full year of income for a 10-year duration bond,” Jean Boivin, head of BlackRock Investment Institute, wrote in his weekly commentary Monday. “Such moves can happen quickly in this new macro regime,” he added. Money market funds don’t carry the same risks because they hold extremely short-dated securities, explained Shelly Antoniewicz, deputy chief economist at the Investment Company Institute. The weighted average maturity (WAM) of retail government money market funds is 25 days, according to ICI. To gauge the volatility, investors can look at what’s happening with the one-month Treasury bill, Antoniewicz said. “It’s very stable,” she said. “It is going to be pegged very much to the federal funds rate.” Here are the largest retail government money market funds, according to Crane Data. Government funds make up about 80% of the market, while prime funds — which include corporate credit — account for about 20%. Investing in money market funds The interest in money market funds began to heat up when the Federal Reserve started raising interest rates last year, Antoniewicz said. Some $64.13 billion flowed into money market funds the week ended Wednesday, bringing total net assets to a record $5.71 trillion, per the Investment Company Institute . Net assets also hit a record within retail money market funds, reaching $2.16 billion, the ICI said. The annualized 7-day yield yield on the Crane 100 list of the 100 largest taxable money funds is currently 5.18%. “What is incredible is that in some money market funds, you can earn more than you can in a longer-term Treasury,” said certified financial planner Barry Glassman, president of Glassman Wealth Services. “So if you have stability in a money market fund and an equal or higher yield, why would anyone consider leaving a money market fund to go longer term and have the volatility?” When looking to invest in the assets, he suggests looking at larger government funds. “We are not sure as rates move this quickly what may be volatile and what may break,” Glassman said. “I’m not terribly concerned that government money market funds are at risk. But if I were to look at this, I would go with one of the larger, more stable management companies that have longevity.” However, realize that while you may not recognize the name of a fund, the team or company managing it could be a substantial player, he added. Investors should also bear in mind that because durations are shorter within the funds, they could be missing out on locking in longer-term yields with Treasurys. At its last meeting, the Fed suggested it may start cutting rates sometime in 2024.
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