The Money Market Fund (MMF) will still maintain a NAV of $1.00/share while the bond fund will likely experience an increase in NAV (+Duration for every -1% in Fed fund rates). The rate that MMF pays will likely fall off more quickly than the bond fund rate as Retired@50 said.If the Fed cuts interest rates, money market rates would presumably drop accordingly, and quickly, as would bond fund yields, no?
Bond yields and MMFs are both correlated to the Federal Funds lending rate, but they have different maturities/durations. It's much shorter for MMF so they can maintain a stable NAV, but will react to rate change more quickly due to the shorter duration of holdings (typically T-Bills and ultra-short commercial debt). It's longer for bond funds depending on the prospectus of the fund (short-term is likely 2-3 year duration, intermediate is 6-8 year duration, and long-term is likely 12-14 year duration) and the fall off in interest rate of a fund is slower than for a MMF, proportional to the fund's duration (the pipeline of existing bonds creates a lag until investors notice a difference as existing bonds are replaced with lower-yield new bonds).How do bond fund yields and money market rates correlate?
Note that duration and maturity are not the same thing. Vanguard Long-Term Bond ETF (BLV) for example has a duration of 13.5 years, but a maturity of 22.5 years, which means they mostly are holding 20 years bonds with a few 30 year bonds, but they are only holding those bonds for about 13-14 years and then turning them over to match the duration/risk goal.
Statistics: Posted by bonesly — Tue May 28, 2024 1:02 am — Replies 16 — Views 1562