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Sunday, March 16, 2008 11:24 AM

Negative Yields On Treasury Funds

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Treasury yields on 3 month T-Bills have fallen to 1.16%. Any money market or short term treasury fund that has high fees or expenses higher than .16% is now (or will soon be) offering returns under 1%.

Any fund with fees in excess of 1.16 will be offering negative returns.

Here is an interesting story from March 11. At that time 3-month rates were 1.46%: Rate cuts pummel money market funds.

Low interest rates and high fees have driven yields on two small broker-sold money market funds below 1%. Some funds now collect more money in expenses than they pay investors. That hasn't happened since 2001.

One of the funds whose yield has fallen below 1%, BB&T U.S. Treasury money market fund, charges 1.43% in expenses and pays a seven-day simple yield of just 0.88%, according to iMoney.net, which tracks the funds. The other, Merrill Lynch WCMA Treasury fund (class 1), charges 1.5% and yields 0.95%, according to iMoney.net.

Funds with the highest expense ratios have seen the sharpest declines in yields. Typically, broker-sold B and C share classes have the highest expenses, because they impose up to 1% for marketing and distribution costs, beyond the cost of managing the fund. The average fund charges 0.55% in expenses.

"It's a good time to look at your expenses," says Peter Crane of Money Fund Intelligence, which tracks the funds. Vanguard Treasury Money Market fund is one top performer: It has a 0.24% expense ratio and yields 2.88%.
Yield Curve For March 15, 2008

Curve Watcher's Anonymous is taking a look at the yield curve.

Given that the BB&T U.S. Treasury money market fund, charges 1.43% in expenses and given the three month T-Bill yield is 1.16% ... well you do the math.

Anyone selecting BB&T has holes in the head and will soon have holes in the pocket.

VMPXX Vanguard Treasury Fund

Let's take a look at the investment strategy document for Vanguard Treasury Money Market Fund (VMPXX)

The fund invests solely in high-quality, short-term money market securities whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 80% of the fund’s assets will always be invested in U.S. Treasury securities; the remainder of the assets may be invested in securities issued by U.S. government agencies. The fund will maintain a dollar-weighted average maturity of 90 days or less.

VMPXX Yields

click on chart for sharper image

The expense ratio for VMPXX is .24% in contrast to BB&T's ratio of 1.43%.

Those seeking safety in short term treasury funds might wish to consider VMPXX. However, don't expect the above yields to hold. They can't if short term treasury yields keep dropping, or even stabilize here. But unlike other funds, there is little risk of negative yields in VMPXX.

Mike "Mish" Shedlock
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