Money Market Funds are still yielding 5% while long term rates have fallen 1 point.

If you were watching markets in November and December, you undoubtedly heard that investors expect the Fed to transition in 2024 toward rate reductions. While long term rates have fallen substantially, short-term yields remain elevated, offering investors real positive rates.

Long term rates are coming down

That news led investors to drive the 10-year treasury down by a point, from 5% to 4% in just 2 months. That drop allowed stock markets and bond funds to rally, allowing the S&P500 to end the year at an all-time high.

Meanwhile, lower long term rates have flowed through other aspects of the economy: the average 30-year fixed mortgage rate fell nearly 1.30 points from 8.00% to 6.70%.

Money market funds still offering >5% yields

But I have even more good news: while longer term rates have fallen dramatically, short-term rates remain elevated due to the Fed Funds Rate staying unchanged. Investors drove the long term rates down on the expectation of future rate cuts, but until that actually happens, we will likely enjoy higher short term rates.

That’s great news for savers who want to use Money Market Funds. I surveyed over a dozen money market fund providers and found that all of their taxable funds are yielding over 5% as of Jan 8, 2023.

On top of that, inflation has fallen from >8% to ~3% today, meaning that money market funds are returning positive real interest rates of ~2%, as opposed to a negative real rate which we had just a year ago.

Where we go from here

If you are anticipating short-term capital needs (e.g., within the next 1 year), money market funds can be a great option to receive high yield with minimal risk. However, keep in mind that money market yields will likely fall as soon as the Fed starts cutting rates.

Given that change on the horizon, you may want to consider locking in higher rates now while you can. CDs are one option for this, but they have limited/no liquidity. Alternatively, bond ETFs will enjoy a price increase as rates start to fall. This price effect is strongest for longer term bond funds.

Here, we can see that the Vanguard Long Term Bond ETF (BLV) has a total return of +16% since Oct 30, when long term rates started falling. In the same period, the Vanguard Short Term Bond ETF (BSV) has a total return of +3%. If you expect long term rates to keep falling, holding a long term bond ETF can be an excellent way to gain exposure.