Saturday, August 26, 2006

PayPal money market yield rises to 5.04%

Here are some recent money market mutual fund yields:

  • iMoneyNet average taxable money market fund 7-day yield rose from 4.71% to 4.72%
  • PayPal money market fund 7-day yield rose from 5.01% to 5.04%
  • ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.51% to 4.49%
  • Fidelity Money Market Fund (SPRXX) 7-day yield at 5.02%
  • Fidelity Cash Reserves money market fund (FDRXX) 7-day yield was unchanged at 4.98%
  • Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.46% to 4.47%
  • Fidelity Federal Municipal Money Market Fund (FTEXX) 7-day yield at 3.28% or tax equivalent yield of 5.05% for the 35% marginal tax bracket and 4.56% for the 28% marginal tax bracket
  • 28-day (1-month) T-bill investment rate was unchanged at 5.17%
  • 91-day (3-month) T-bill investment rate was unchanged at 5.11%
  • 182-day (6-month) T-bill investment rate fell from 5.23% to 5.17%

I need to look into what is going on at Fidelity. I hadn't noticed SPRXX before and they used to talk about FCASH, which I no longer see. Maybe they've seen the light and done the right thing, or maybe they've simply confused matters even worse. I'll have to investigate further how they are handling "core" cash these days for a taxable account (which I do not have, yet). Next year, when I have an extra $2,500 in free cash I will consider using a Fidelity account for payroll direct deposit and checks and bills. Since I pay most of my bills (including back taxes) through direct debit from my bank account, I'll have to check into whether Fidelity can handle that. They do have "BillPay", but that's different and not what I need.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking acccount for easy access. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month. For example, I would not be able to move all of the cash in my Siebert taxable account to PayPal in one month. Update: I'm not sure if this is really true since my limit remained unchanged even after I made a deposit for the full limit amount. I'll have to investigate further.

Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

As always, please note that cash placed in money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky


At 10:52 AM EDT , Anonymous Anonymous said...

This is actually a very interesting investment instrument at this rate. But all the assumed bullshit I've heard about paypal kind of kept me at bay. Until, I did however put a $1000 in just to test the waters. If there are any limits to the basic account I haven't received any reprecussions, well at least not yet. But for idle cash and the other reasons you stated yes paypal is looking damned good for storing some un-needed residual cash!

At 9:17 AM EDT , Blogger Richard said...

This comment has been removed by the author.

At 9:18 AM EDT , Blogger Richard said...

Given the current state of the evolving credit crunch, any idea how "safe" PayPal really is?

I read the prospectus and see no indication that their manager invests in mortgage instruments.

At 2:46 PM EDT , Anonymous Jack Krupansky said...


Thanks for the query and my apologies for taking so long to respond since I needed to research the issue.

The short answer is that it is very unlikely that any money market fund would have a significant exposure to mortgage bonds or any other kind of asset-based security.

First, the rules for this and many funds do allow some higher risk investments, but only on a very limited basis. There is a section in the prospectus entitled Investment Risks which has Asset-Backed Securities described first, so it is something that they can do, but clearly they recognize it as a risk and hence would not put very many eggs in that basket.

Second, my its nature and rules, a money market fund holds only short-term securities (397 days, 13 months, or less). That certainly rules out most mortgage securities by definition.

I did check the 2006 Annual Report (most recent) and did find two CDOs and a few "Asset Securitization" holdings. Total of maybe $280 million out of a Total master portfolio of about $6.9 billion. Worst case, about 4% of assets. The two CDOs amounted to $48 million or 0.70% of assets. But, that's for 2006, so I have no way of knowing what they hold today.

In short, I see nothing to suggest that there is any significant risk of a "blow-up", but of course that is never a guarantee that something might not happen.

I'm not worried about my money in PayPal, but I'm not keeping more than a fraction of my cash there anyway.

Bond funds could have more MBS/CDO/Asset-Backed exposures, but even then the overall exposure would tend to be fairly limited.

The good news about any credit crunch is that as money market fund holdings mature (literally every week and every month if not daily), the new holdings will likely produce a higher yield.

-- Jack Krupansky


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