"Tax-Free Fund Complex Continues to Teeter" writes The Bond Buyer. It says, "The tax-free money market fund industry continues to shrink rapidly, squeezing what had been a major source of short-term credit for municipalities and arguably leading to higher borrowing costs for state and local governments.... Investors yanked $92.4 billion from tax-free money market funds in 2009, and an additional $71.8 billion so far in 2010, according to the Investment Company Institute. The tax-free money fund industry, which ended 2008 with $489.3 billion in assets, has shrunk by a third in the past two years, to $325 billion. The impetus behind the exodus of cash is no mystery: returns on the funds are too low for investors. Money market funds behave like cash by investing only in instruments with supreme safety and liquidity. Yields on these instruments tend to shadow short-term low or no-risk interest rates, such as the Federal Reserve's federal funds rate or short-term Treasury bill rates. Thanks to the Fed's commitment to keeping benchmark interest rates near zero, these rates have been pinned to the floor for two years. The Securities and Financial Markets Association swap index measures the average yield on a seven-day tax-exempt variable-rate demand obligation, which is the primary instrument tax-free money market funds buy. That index at its latest reading, on Dec. 15, was 0.3%."

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