Yields on tax-exempt money market funds have shot up in the last two weeks due to massive withdrawals from tax-exempt municipal market funds. At an average seven-day annualized yield of 5%, these money market funds are offering the highest yielding short investments since the 1980’s.
CNNMoney reports, "the dramatic jump in yields can be traced back to a chain of destabilizing events in the credit markets," starting with the Lehman Brothers bankruptcy filing on September 15th. When the Reserve’s Primary Fund bailed Lehman out of its $785 million debt, investors pulled cash out of taxable and tax-exempt funds, and fund managers loosened their cash by preemptively selling securities.
Tax-exempt funds, like Vanguard’s Treasury Money Market fund (VMPXX) experienced increased rates "because muni fund portfolios are dominated by highly liquid securities known as variable rate demand notes (VRDNs) which have regularly resetting rates," and Wall Street firms and commercial banks raised yields to sell off the inventory. "Because of the way these securities are structured, the rates that reset in the marketplace also apply to the notes already in the funds’ portfolios."
The aberration in pricing might present at least a short-term opportunity for investors.