Muni money market funds and insane yields
FTEXX, a core muni money market fund that I use in my Fidelity account, recently had a 7-day yield of 5.7%. That's unheard of. There are a number of factors at play.
First, spooked investors have been pulling money out of all sorts of money market funds. Investors have been flocking to Treasuries, which are as safe as the US government. Tax free MM funds have fewer assets than taxable, and the outflows have drastically pushed yields up. A Kiplinger article contends that banks have been dumping munis for even more liqiud securities like Treasuries. Of course, that raises a question if there is anything to be worried about as regards liquidity - this is a MM fund, after all, which would face daily redemptions.
The Wall Street Journal highlights the issue of muni variable rate demand notes (VRDNs), which seem similar to the infamous auction rate securities. VRDN rates were to be reset weekly, but the market has frozen up. Most VRDNs have put options, where the holder can put them to the issuing bank. That's been happening a lot lately, as holders are worried about the banks' creditworthiness. Any remaining VRDNs then have to offer ridiculously high rates to attract any investors at all.
A consequence is that municipalities must cut back on many projects, as they can't get financing at an acceptable rate. Projects as reported in the NY Times article I linked include emergency rooms, road repairs, and other stuff like that.
I'm putting a bit more into my muni MM fund to take advantage of the yields. It's likely that muni MM issuers will participate in the insurance scheme the Fed proposed, or that they'll stand by their funds. However, this isn't something we want to continue in the long run for obvious reasons.