Money market mutual funds are preparing for outflows as the April 15 tax deadline approaches. Last year, money funds saw about $31 billion flow out in the two weeks following 4/15, while the total was just under $30 billion the prior year. When tax-time approaches, investors tend to reexamine the attraction of tax-exempt investments. But beware the volatile nature of tax-free yields; over time they usually make sense only for investors in the highest tax-bracket.

Tax-exempt money fund yields have been attractive recently due to concerns over bond insurers and a bulging supply pipeline (caused by auction-rate and other securities shifting issuance into more liquid channels). But high yields are usually fleeting. Our Crane Tax-Exempt Money Fund Index averaged 1.86% as of March 31, which translates into a taxable equivalent yield (TEY) of 2.86% for investors in the 35% bracket.

Currently, the top 10 Tax-Exempt money funds, according to Money Fund Intelligence (out of 437 total), along with their 7-day yields, include: 1) Dreyfus Basic NJ Muni MMF 3.00%; 2) AIM ATST Premier Tax-Exempt Inst 2.92%, 3) American Perform Tax-Free Sel 2.69%; 4) USAA Tax Exempt MMF 2.69%; 5) Alpine Municipal MMF Y 2.68%; 6) Federated Municipal Obligs IS 2.65%; 7) Columbia Municipal Res Z 2.64%; 8) Dreyfus Municipal Cash Mg Pls Ins 2.64%; 9) Columbia Municipal Res Capital 2.64%; 10) USAA Tax Exempt CA MMF 2.60%.

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