This weekend, the Associated Press wrote "Don't count out money market mutual funds" (here in the Boston Globe). The article says, "It's hard to market any investment when its annual yield starts with a zero. Take money-market mutual funds. Yields for the safest of safe-harbor investments have been creeping close to zero for more than a year.

It continues, "Normally you'd expect money funds to earn 2 percent to 4 percent a year, but now the average yield is down to around 0.03 percent -- a few hundredths of a penny for each dollar put in. That's a record low since money funds emerged as alternatives to bank accounts for keeping money safe and quickly accessible. Typically, you get a slightly higher yield from a money fund than from an interest-bearing bank account offering comparable check-writing privileges.

AP writes, "Bank or money fund, yields are just plain low now because interest rates are near zero. But with money funds, there could be even more shrinkage soon. Last week the Securities and Exchange Commission approved new rules to make money funds safer. With investing, more safety means lower returns, and money funds are no exception. Don't expect any big drop -- yields don't have much lower to go. And most managers have been running their funds more conservatively for months now in anticipation of the new rules."

They add, "Still, if yields may become even slightly smaller, why stick with money funds? Why not join the crowd that has pulled some $700 billion out of money funds since their assets peaked at $3.9 trillion a year ago? Well, look before you leap, even if money funds stink now. Once interest rates rise from their current near-zero levels, they could come out looking pretty good. Keep in mind, it's only a matter of when rates will rise."

The article, written by Mark Jewell, quotes Peter Crane of "fund industry researcher Crane Data, publisher of the newsletter Money Fund Intelligence," "The risk of rising rates is that it tends to blow up bonds."

Finally, the piece says, "What if you face an unexpected medical bill, or find that house you've been looking to buy, and need a down payment, pronto?" It quotes Crane, "Liquidity isn't important, until you need it."

In other news, see the release, "SEC Charges State Street for Misleading Investors About Subprime Mortgage Investments," which involves losses in an ultra-short bond portfolio. (See our Crane Data News Aug. 29, 2007, "State Street Limited Duration Bond Incorrectly Called Enhanced Cash".) Robert Khuzami, Director of the SEC's Division of Enforcement, says, "State Street led investors to believe that their investments were more diversified than a typical money market portfolio, when instead they were invested almost entirely in subprime investments that ultimately caused hundreds of millions of dollars in losses."

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