Investors might be contemplating which option is better, a bond mutual fund or a money market fund. It is a tricky answer, especially when the usual pattern of interest yields is out of whack, as it is right now, according to Bloomberg columnist Chet Currier.
Under normal conditions, bonds offer a higher yield than money markets to compensate investors for trying up their money for a period of year. However, as of last week, yields on two-year Treasury notes, at about 4.75 %, were noticeably higher than yields on 10-year Treasury notes, at about 4.6 %.
Better returns can be found among money market mutual funds specializing in government securities with average maturities of a month or tow. As of Nov. 7, according to researchers at Imoneynet.com, the seven-day yields of several government money funds were 4.9 % or more.
At first, one might think money funds should be the choice since you get more yield for less risk to your principal. To support that decision, the U.S. Federal Reserve looks set to hold short-term interest rates about where they are for at least the next several months.
However, if and when the Fed starts lowering short-term rates, money market yields will follow soon after. At that time, there is no telling what sort of yields will be available to investors who would then look to switch to securities with longer-term maturities.
For the typical investor, it isn’t an easy call to get right. But maybe an investor should not be overly worried about trying to figure out future interest-rate fluctuations. A reasonable choice can be made between bond funds and money funds based on your own circumstances, rather than what the market may do.