Thursday, July 30, 2009

Credit markets still dicey

Money market funds today generally yield nothing, one basis point, five basis points, maybe ten, while short term bank CD's pay only 30 basis points. Today the Schwab and Fidelity New York Muni money market funds yield that one basis point, a ludicrous tax efficient investment. Schwab pays 10 basis points on its money market fund for high net worth clients and E-Trade pays five basis points. Fidelity is now paying 40 basis points on its advantaged money market fund.

There is no yield out there at the moment for retail investors, and it's a little puzzling. E-Trade unequivocally wants to force all clients into its bank charter, and a yield that can be much higher, while building its deposit base, a necessity given its troubled situation. Schwab, Barron's recent high profile of Charles Schwab aside, is positioning itself for a sale to fund his charities and his family. Schwab is milking its franchise and using more advertising than any other broker to build its client base, an important measure in any sale. HSFB here we come. Morgan Stanley Smith Barney has a three basis point yield on its core bank deposit program, but will at least discuss a DBScudder fund that will yield 30 basis point, an extra few sandwiches during the year.

The fact is that I do not understand this well at all, and it is a little unnerving. It's good news for the stock market, commodities markets, and corporate bond markets because anyone awake must go elsewhere to put money to work. It's not good news for anyone looking to preserve a nest egg and avoid risk after the debacle we have just experienced in the financial markets. Is it possible to go to negative yields in money market funds, that's a strange thought, as in paying for the right to get your money back safely.

Meanwhile, banks are in a resurgance, paying 75 basis points for FDIC insured money at Chase and paying 95 basis points at BofA for a hybrid CD/market fund. Creating as many different deposit titles at banks is now worth the effort.


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