Banks Trounce Money-Market Funds

If you're looking to earn the highest interest rate on your stash of cash, a bank is your best bet. Some banks are paying more than 2% on their money-market deposit accounts, while taxable money-market mutual funds yield an average of only 0.12%. Plus, your savings are insured up to $250,000 per account, at least through December 2013.

For example, with a minimum deposit of just $100, you can open an Advantage Savings Account with the Bank of Internet that pays 2.5%. Andy Micheletti, the bank's chief financial officer, says that the bank is lending money at an effective rate of 6.75%, so it can afford to pay savers 2.5% and still make a profit. In addition, as an Internet-only bank, it does not have the expense of maintaining bank branches.

Yields on money-market funds remain low because they mirror the current low yields of Treasury bills and other short-term securities that make up their portfolios. Plus, investors' confidence in the safety of money-market funds was shaken last fall when Reserve Primary Fund "broke the buck" -- that is, its net asset value (NAV) fell below $1.

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The Securities and Exchange Commission has proposed regulations that would establish new liquidity requirements, bolster the credit quality of the funds' portfolios and require more-frequent disclosure of fund holdings. The new rules are unlikely, however, to include a switch to a floating NAV, which would mean that individual investors could lose money. Pete Crane, editor of Crane Data, says that investors won't notice any changes when the new rules are enacted.