Money Market Fund Yields May Fall to Less Than 0%

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Money market funds invested in Treasuries will provide a negative return to investors if the Fed cuts rates next week, as its widely expected to do. This will be the first time this has ever happened. It's another

Money market funds that invest the bulk of their cash in treasury bills may provide a negative return to investors if the Fed cuts rates any further.  Low Fed Funds Rates combined with a rush to own the safety and security of treasury bills have pushed the yield on T-bills down to 0%.  Money market funds that invest in Treasury Bills therefore receive a 0% return, or a very low return from their investment.  Once the expenses of running the money market are factored in, the actual return of the fund will be less than 0%.

A Bloomberg article on this says:

'Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields."'

If returns turn negative, Crane believes that the funds will cover the shortfall by charging customers in the form of monthly fees.  The end results would be a negative return for investors.  This is different from a money market fund breaking the buck.  When a fund breaks the buck, the value of its assets fall, wiping out some of the principal of the money  market.  That is what happened to the Reserve Primary Fund  (RFIXX) when it lost considerable money due the bankruptcy of Lehman Bros.

Remember, this would only happen to money market fund that invest primarily in US Treasuries.  The BestCashCow Money Market Fund Rate Table lists several funds that are far above 0%, the highest paying 2.57%.  This is a far cry from September when the collapse of Lehman froze the money markets and drove yields up to the 4-5% range. 

The question is how long will Treasuries stay below 0%.  Even if the Fed drops the Fed Funds rate to 0%, some believe that Treasury yields will still rise.  Bill Gross, manager of the world's biggest bond fund had this to say on Bloomberg TV:

"“Treasuries have some bubble characteristics, certainly the Treasury bill does.  A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”

After bank deposit accounts and treasuries, money market funds are considered the safest and most liquid places to store money.  Despite being safer than money market funds, bank savings and money market accounts pay far more interest.  For example the top savings account on the BestCashCow rate table pays 4.00% APY why the top money market fund pays 2.57%.  

Money market funds, which are not FDIC insured should be not confused with money market accounts, which are.  


Etrade Offering Up to $500 Cash To Open Account

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Online brokers are stepping up in a bid to grab customers amid a volatile market. Etrade is offering up to $500 cash for users who join its Power ETrade program.

Etrade$500CashOfferOnline brokers are stepping up in a bid to grab customers amid a volatile market.  TD Ameritrade recently came out with an offer of 30 days of free trades and $100 cash top open a brokerage account.  Now, Etrade is offering up to $500 cash for users who join its Power ETrade program.

To be eligible, you must first become a member of Power Etrade.  To qualify, you must execut at least 30 stock or options trades per quarter.  If you deposit $50,000+ at Etrade and do at least 30 trades per quarter, the price per trade is $9.99.  So, to become a Power Etrade customer you have to plan on spending a minimum of $300.  If you planned on doing a lot of trading anyway, this is no big deal. If you're a one stock a year kind of investor, this deal may not be for you.

So, assuming you become a Power Etrade customer, you then will receive the cash credit based on how much you deposit.  The schedule is below:

Deposit                                    Cash Credit

$250,000+                               $500

$100,000 -    $249,999          $250

$25,000 - $99,999                 $100

$1,000 - $24,999                   $1

I'm not even sure why they bothered with the lowest tier unless there was some regulatory requirement.

I have a regular, non-Power Etrade account and have been generally pleased with it.  In addiiton, to their brokerage account, Etrade also offers a competitive savings rate with a $1 minimum balance


E Trade Offering $25 To Open a 3.3% APY Savings Account

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Etrade is offering $25 to open a Max-Rate Savings Account. The account currently pays 3.3% APY which is competitive.

Etrade is offering $25 to open a Max-Rate Savings Account.  To get the $25 you only need to fund the account with $1.  Payments are made within 30 days of account opening.   The offer is good until December 12, 2008.  As with these types of offers, if you already have an account with Etrade, you're out of luck.  The bonus is for new customers and new money only.

The Max-Rate Savings Account pays 3.3% APY, which is competitive compares to the best savings and money market rates.

The Etrade application is very easy and you can open it electronically and then fund it via their Quick Transfer capability.  This is basically a simple process for requesting an ACH transacation to and from other financial institutions.

As a company, Etrade has experienced its share of problems.  It's currently trading at $.85, down from a 52-week high of $6.00.  It's forays into mortgages ended badly.  Bauer Financial gives it two starts (poor) for safety and soundess.  Deposits in Etrade are insured by the FDIC.

Thanks to BankDeals for pointing this offer out.

Compare E-Trade with other online brokerages here.