No-Tax Deal Fading Fast

In the past few weeks, investors have found an unlikely place to score unusually high yields: tax-free money-market mutual funds. But experts say the super-high rates are already fading.

While there's still an opportunity to shift money over from taxable money funds, do that only if you're prepared to check back and possibly reverse your move in coming weeks or months.

Last week, the seven-day yield on Vanguard Tax-Exempt Money Market Fund was 3.73%, well ahead of the 2.56% on the taxable Vanguard Prime Money Market Fund. The advantage of the municipal fund grows when taxes are factored in: For someone in the 28% bracket, that tax-free 3.73% is equivalent to 5.18% on a taxable fund.

But the yields on muni money funds have been slipping fast, to an average 2.8% last week from more than 5.25% at the end of September, says Peter Crane, founder of Crane Data, a fund researcher.

Muni yields are usually lower than those on taxable securities. As credit dried up across the country recently, though, towns and other municipalities had a difficult time rolling over their debt. They had to pay higher interest as investors worried that cash-strapped borrowers could have trouble repaying.

But as money rushes back into the sector, "the phenomenon is going to disappear," bringing the rates "back down to earth," says Mr. Crane.

Write to Shelly Banjo at shelly.banjo@wsj.com