MMMF vs. CDs

The "yield curve" is unusually shaped right now: It's inverted. This means MMF pay about the same as bonds with a maturity of five years or so. How long this will continue is anyone's guess, but historically, this doesn't last more than a couple of years.

Whether one wants to buy some slightly higher yielding CDS, or build a ladder going out, say, five years, is a matter of personal preference. The five-year ladder might lock in good rates if and when MMF rates fall. Of course, all could rise, too.

An excellent interactive graphic explaining yield curves appears at:

Flexibility. As you pointed out, you can pull your money out of a money market fund at any time and not suffer any penalty. Many money market funds will give you check writing privileges. You don't have to worry managing the CD ladder, yourself. The money market fund also pools your money together in one place. This may get you a better interest rate. If you build a CD ladder, you may have enough money in total to get the higher rate, but the individual CDs are smaller and won't qualify.

As an aside, most money market funds are heavily invested in CDs. Vanguard's prime money market fund, for example, hold 53% CDs. If you're invested in such a fund, your return should be somewhat closely tied to the return on CDs.

On the other hand, CDs are FDIC insured. I think you can typically get a higher rate of return from CDs. As Elle pointed out, the yield curve is currently inverted, so you can take advantage of that when puchasing CDs.

One last thing to consider if you're in a high tax bracket: tax-exempt money market funds. Vanguard has 6 such funds. One is exempt from just federal taxes and the other 5 are exempt from state and local taxes in CA, NJ, NY, OH, and PA (they're exempt from federal taxes, too). USAA has tax-exempt funds for FL and VA, as well. The rule of thumb I've heard is to go with the tax-exempt funds if you're in the

--Bill

If response to your questions, if you want your funds to stay "very liquid" then I would suggest some of the Awesome savings plans available online right now through ING Direct or CitiBank or whatever... There are no fees to maintain or withdraw funds from the account, and right now they are paying 5% or better..

You can attach the account directly to your current ckecking account, and add more funds at anytime to make saving that much easier.. If and when these rates fall back to normal (around 2-3%) then I would shop for a fund or something like that..

This way is very safe, very secure, easy to manage, and right now pay as well as any short term CD...

Best withes, and good luck in the financial jungle out there!

Jon Davidson

Not to nitpick... but ING is only paying 4.5% right now. and in order to qualify for the 5% at citi bank you have to have a citi bank checking account.

Hope this helps, Shhhh

CDs are almost neer a good thing.

Even if you waste time on the calculus and it turns out that you're making 0.1% more in interest, the fact that you can't withdraw whenever you want should be the deciding factor.

Just find a good money market account that has checkwriting capabilities.

--Mike...

Shhhh wrote:

I'm amazed that Chase is only showing 2-3% for their "Premier" savings accounts.