Cash yields are already low. But as we move into December, we could see even lower, then higher, yields as the tax-free bond market goes through its annual spasm. You have to be aware of this so you don’t panic or make a bad move based on incomplete and rapidly changing data.

Mid-December is typically when we see tax-exempt money fund yields hitting rock bottom. Take a look at the chart below, which shows what happened one year ago.

Yes, yields were declining steadily, as the line representing the yield on Prime Money Market suggests. But the “wobble” in tax-exempt yields suggests something else was going on. Take Tax-Exempt Money Market, for example. At the beginning of November 2008, its yield was 1.86%. Yet, just 26 days later, that yield had fallen to 0.96%, a decline of 90 basis points, or almost half. Prime Money Market’s yield fell a bit more than 9% over the same period.

Of course, as we’ve seen time and time again, those tax-exempt yields began rising again days later.

The cause of this seasonal roller coaster in yields is related to machinations in the market for short-term tax-exempt securities. And last year, the roller coaster was especially pronounced given the general lockup of credit markets here and abroad.

My advice remains the same as it has been: Find the money market fund that suits your income, safety and tax requirements, and stick with it. If you have a longer-term perspective for some of your “cash,” consider using a short-term bond fund like any of the short-term taxable funds, or even the ultra-short Short-Term Tax-Exempt. You’ll get a pickup in yield, but remember that these are bond funds, not money markets, so you do have some principal risk over short periods of time, as the table on below shows.

Bond Risk Versus Cash Return

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