Chart of the Week: Déjà Vu All Over Again for Yields

Jeffrey DeMaso

Portfolio Manager

Cash has been king this year, and money market yields sure are looking tempting this month. But be aware that the spike in tax-exempt (aka municipal) money market yields is likely to prove fleeting.

Vanguard Municipal Money Market fund’s yield has more than doubled in December—rising from 1.70% to 3.46% (as of Tuesday). Meanwhile the yield on Vanguard Cash Reserves Federal Money Market has only increased from 3.72% to 4.13% over the same period.

How do we explain that massive upturn in the tax-exempt money market fund’s yield? (And note that these changes in yields are not limited to Vanguard funds; they are found across the industry. I’m just using Vanguard’s funds as a proxy here.)

We can attribute part of the move higher in money market yields to the Federal Reserve hiking the fed funds rate in the middle of the month. But that’s not the whole story—otherwise the taxable money market’s yield would have moved dramatically higher too.

And even if the Fed has put its finger on the scale in 2022, this municipal money market yield bounce is a pattern we’ve observed in years past. Tax-exempt money market yields spike higher in December only to reverse course in January (see the second chart below showing what happened in late 2019 and early 2020—the last time yields were significantly above zero).

This seasonal rise and fall in yields reflects the actions of both individual investors and institutions.

Regular investors sell money market funds to cover holiday bills. Institutional investors engage in year-end “window dressing” (temporarily altering their portfolio to show a specific outcome, e.g., a higher absolute yield), shifting from lower-yielding municipal money market funds to higher-yielding taxable bond funds. In January, when individuals and institutions revert to their normal activities, money market yields correct.

So, if you own a tax-exempt money market fund, enjoy those higher yields while you can. Like all good holiday deals, they won’t last forever.