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A day after Vanguard announced the liquidation of two municipal money market funds, it has converted its Prime Money Market to a Cash Reserves Federal Money Market fund, making it more accessible to retail investors.

(Related: Vanguard to Liquidate 2 Money Market Funds)

The Vanguard Prime Money Market Fund change, announced in late August, drops the minimum for more than 1 million Prime fund investors from $5 million to $3,000 and the fees they pay from 16 basis points to 10 basis points.

(Related: Vanguard Reopens, Reorganizes Money Market Funds)

The changes announced by Vanguard are just the latest in a series of changes affecting money market funds more broadly due to near-zero short-term rates in the U.S., which the Federal Reserve expects to maintain through the end of 2023.

Yields are so low that fund companies have to subsidize costs or close funds, according to Daniel Wiener, chairman of Adviser Investments and senior editor of The Independent Adviser for Vanguard Investors. He describes the situation as “a perfect story that will continue to lead to fund closures.”

Indeed, in August Fidelity Investments liquidated two institutional prime money market funds — Fidelity Investments Money Market Prime Money Market Portfolio and Fidelity Investments Money Market Prime Reserves Portfolio — and Northern Trust liquidated its Northern Institutional Prime Obligations Portfolio in July.

Fidelity said it was seeing “declining investor interest in institutional prime money market funds and increased investor interest in government and retail money market funds” due to “regulatory changes enacted several years ago requiring institutional prime money market funds to transact at a floating or variable net asset value (NAV), which allowed fund boards the option to temporarily impose redemption restrictions during times of market stress.”

(Related: How Asset Managers Are Addressing the Threat of Negative Yields)


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Vanguard said there is a short supply of certain types of municipal securities available in Pennsylvania and New Jersey.


Say goodbye to your single-state municipal bond money-market fund. That could be the upshot of the announcement last Friday by Vanguard Group, which said it was liquidating its Pennsylvania and New Jersey muni money-market funds.

“Due to the short supply of certain types of municipal securities available in Pennsylvania and New Jersey, we believe these specific municipal money markets no longer offer the market depth needed to prudently provide these state-specific products in all market conditions,” Vanguard said in a news release.

The truth is, yields are so low for the ultra-short-term, high-quality municipal debt that money markets buy, particularly in high-tax states, that they can’t cover their costs.

“Tax exempt money-market funds and particularly state specific ones are on the endangered species list,” Peter Crane, president of Crane Data, a company that tracks money markets, said. “The assets are few and far between, and they are going to be hurt most from another zero-yield environment because [muni] tax exemptions don’t help you if there’s no income.” He notes that there are only 71 single-state money markets today with $34 billion in assets, down from $152 billion in 2008, when interest rates previously dropped to zero because of the financial crisis. Rates have remained low ever since.

Nor are muni funds the only ones suffering from a lack of yield. This month, Vanguard converted its Prime money-market fund to Vanguard Cash Reserves Federal Money Market, which invests only in government bonds, for similar reasons.

In the case of the $1.8 billion Vanguard Pennsylvania Municipal Money Market Fund (ticker: VPTXX), its SEC yield as of Sept. 24 was 0.01%, while the yield on the $1.2 billion Vanguard New Jersey