Fidelity Investments published a brief paper, entitled, "New life for money markets." It says, "Money market yields flatlined over the last few years. With the Fed's short term borrowing rates pegged near zero, little yield was to be found for investors looking for the easy access to their funds that money markets provide. But recently, money market funds have shown signs of life -- since the market began to price in a Fed move, yields have crept higher on government funds and also on prime funds, which invest in corporate debt securities." It continues, "Since the Fed took its key interest rate, the Fed funds rate, down to near 0% in 2008, money market funds have been barely breaking even. In fact, at times some mutual fund companies have reduced investor fees to keep returns positive. But last year, the Fed began preparing to raise interest rates. Even the anticipation of the rate hike caused rates in some prime money market funds to move higher. Then, in December, the central bank raised its target for rates by 0.25 percentage points. Since then, government money market funds have risen to an average of 0.06% as of February 9, and prime funds have seen yields rise to an average of 0.14%, with some top-yielding funds paying more than 0.30%. "The difference in yields for prime and government funds moved closer to its historic average following the Fed's decision to increase the Federal funds target rate to a range of 0.25% to 0.50%," says Michael Morin, director of institutional portfolio management at Fidelity. Yields are still low historically, but the pickup has been meaningful, and perhaps more importantly, it shows the potential for money market funds to adjust yields rapidly as rates change -- a feature that could be useful if rates continue to tick higher." It goes on, "The biggest move in rates has been in prime funds. But, before jumping in, investors should note that the rules for both prime funds and municipal money market funds are changing. [N]ew rules are changing how some money market funds work. Government money market funds won't be affected, so those can still provide the same easy access to cash that they have historically. But, in a time of market stress, prime and municipal money market funds could charge a fee for withdrawals or impose a temporary halt on withdrawals. So they may no longer be as liquid as U.S. Treasury or government money market funds. To comply with these new rules, some money market funds have changed their approach. What does that mean for you? If you rely on money market funds for short-term cash needs ... you may not want to keep all your cash in a prime or municipal money market fund. For cash that truly must be liquid, you may want to consider Treasury or government funds. If you can tolerate the risk of the fees or temporary withdrawal restrictions, prime funds may offer higher yields and municipal funds may offer tax-shielded income."

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