Money fund yields at four-year low; more rate cuts loom

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Money market mutual fund yields continue to fall as credit conditions thaw further.

Short-term interest rates worldwide could get another push lower on Thursday, when the European Central Bank and the Bank of England are expected to slash their benchmark rates.

The average 7-day annualized yield on taxable money market funds fell to a four-year low of 1.35% in the week ended Tuesday, from 1.54% the previous week, according to iMoneyNet Inc.

Money funds’ average yield was 1.91% in mid-September. Since then, the Federal Reserve has cut its key short-term rate in half, from 2% to 1%, trying to ease the credit crunch.

As Bloomberg News reports here, some money funds are trying to boost their yields by wading back into the market for short-term corporate IOUs known as commercial paper. That’s exactly what the Fed has been hoping to see.

Still, with central banks continuing to push down on short-term rates as the global economy reels, the average money fund yield could drop as low as 1.1% by the beginning of December, said Connie Bugbee, managing editor of iMoneyNet.

On Thursday, the European Central Bank, under president Jean-Claude Trichet, is expected to cut its benchmark rate to 3.25% from 3.75%. The Bank of England will hack its key rate to at least 4% from 4.5%, and may eventually take the rate to zero, according to a Bloomberg survey of economists. (Yes, things are as bad in the U.K. as they are here, and maybe worse.)

U.S. savers unhappy with money fund yields still have a chance to lock in better yields on bank savings certificates, although CD rates, too, are coming down.

The average annualized yield on one-year bank CDs nationwide was 2.58% on Tuesday, down from 2.63% on Oct. 7, according to Informa Research Services. Some banks and credit unions still are offering 4% or more on one-year CDs.