Secrets Behind Money Market Rates

by Mr. Checking

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Money market rates are a hot topic in today's investment climate. Do you want to know whether your money market account is beating the sector average and yielding a high return? Read the guide below to learn more about money market performance.

Basics of Money Market Accounts

Money market accounts are typically low-risk investments that provide withdrawal privileges. The money deposited into the account is invested in securities that provide a relatively stable rate of return. Money market investments can be made through two similar but distinct accounts offering different rates of return: Money Market Accounts and Money Market Funds.

Money Market Accounts (MMAs)

Money Market Accounts, also known as Money Market Deposit Accounts (MMDAs), are savings accounts advertised at banks and credit unions. In exchange for a higher level of interest than traditional savings accounts, institutions place minimum deposit requirements and limit the number of monthly withdrawals. This type of account is insured by the Federal Deposit Insurance Corporation (FDIC).

Money Market Funds (MMFs)

Brokerage firms, banks, and credit unions can sell Money Market Funds, but they are different than Money Market Accounts. MMFs (or MMMFs, Money Market Mutual Funds) are not insured by the FDIC. These accounts often provide higher rates than MMAs, but withdrawal fees and expense ratios may limit some of the gains. In the United States, the Securities and Exchange Commission currently requires money market funds to invest at least 10% of their assets in cash and an additional 30% of the assets must be convertible to cash within one week. MMFs work on a short-term investment horizon and can come in the form of tax-free or taxable accounts.

The MMFs sold to the public are referred to as retail Money Market Funds. They may investment in tax-free municipal bonds and government funds, non-government funds, or a combination of the two. Institutional Money Market Funds require high minimum investments and are open only to large corporate and government investors.

How Money Market Rates Are Determined

Individual banks set their MMA rates. These deposits generally accrue a fixed amount of interest each month or quarter. In contrast, MMF rates are variable based on the underlying assets. While Money Market Funds try to maintain an average value of $1 per share, the investment balance can rise or fall daily. Most importantly, an MMF is an investment vehicle instead of a deposit account, so loss of principal is possible.

Money Market Rate History and Trends

Money market rates for MMAs are generally quoted as Annualized Percentage Yields (APY). At the same time, MMF rates are most often viewed as seven-day post-expense yields that are annualized to obtain an estimated yearly rate.

Historically, MMFs have typically presented higher returns than MMAs. Due to the 2008 global financial crisis and subsequent regulatory changes, MMF yields have dropped as the funds attempt to stabilize and retain investor confidence. As of the publication date, MMAs are producing five- to seven-times higher yields than MMFs. Rates are ranging from 0.63% for a non-high-yield MMA to 0.88% for a jumbo MMA with a balance over $100,000. MMFs are currently yielding between 0.06% to 0.35%, depending on the type of fund and the money manager. Tax-exempt government funds are currently earning more interest than other retail funds.

Despite their relatively low rates, both Money Market Accounts and Money Market Funds are useful for the temporary placement of excess cash. They can be used as a stop between securities trades, as a safe haven for risk-averse investors, or as a way to manage cash for business or investment operations.

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