Tax Exempt Money Market Commentary
by Senior Portfolio Manager Colleen Meehan
This is Colleen Meehan with a Tax Exempt Money Market Commentary for July 2016
- The June higher-than-expected employment numbers were a nice surprise and will hopefully quell some of the recent U.S. labor concerns after the dismal May reports. Prolonged and sustainable employment continues to provide the Federal Reserve with a guideline for future rate increases. Growth in household spending has strengthened.
- The Federal Open Market Committee continued their cautious approach to the nearterm policy outlook at the June meeting. The statement cited risks associated with global growth and recent financial market volatility. The committee continues to closely monitor inflation indicators and global economic and financial developments. July 27 is the next meeting date.
- The Securities Industry and Financial Markets Association (SIFMA) index increased from 0.01% at the beginning of the year to a 0.40% average for the second quarter. The SIFMA index is a weekly high grade market index comprised of seven-day taxexempt variable rate demand notes produced by Municipal Market Data Group. The average year-to-date 2016 is 0.24% vs. a 0.05% average for 2015.
- The changing money market landscape, ahead of money market reform, continues to shift funds into shorter and highly liquid securities. The industry Weighted Average Maturity is currently 20 days with institutional funds posting a 15-day average. We continue to maintain high levels of liquidity and weighted average maturities within the industry averages.
- The annual note season began in June with issuers entering the market with their one-year note financings. As expected, one-year rates have backed up as funds continue to stay short and liquid preparing for the shift in fund assets ahead of money market reform. Demand from separately managed accounts, intermediate bond funds and long-term bond funds has picked up as that sector of the market has seen continued asset inflows. We expect issuance to increase during July with a continued rise in the one-year yield on smaller, local issuers as demand for these notes is limited.
- Careful and well-researched credit selection remains key. Many state general obligation bonds, essential service revenue bonds issued by water, sewer and electric enterprises, certain local credits with strong financial positions and stable tax bases, and various health care and education issuers should remain stable credits.
- Overall, municipal credit now appears to have stabilized following years of slow improvement. This is particularly evident at the state government level, as rainy day emergency funds have been replenished to pre-recession levels, providing a cushion against future economic downturns. The degree of recovery by region, however, remains varied. Isolated credit concerns still persist, such as the State of New Jersey and the State of Illinois, as pension funding and retiree health care benefits remain challenges. The financing of large-scale infrastructure needs is also a crucial issue for all states.
- The City of Chicago and the Chicago public school system are also high-profile credit concerns for the municipal market and the response of the State of Michigan to the Flint water crisis merits monitoring, as this issue may confront other municipal water supply systems.
- States and local economies dependent upon petroleum and natural resource activities have developed as pockets of credit concern and deterioration. In particular, the budgets of Alaska, Louisiana, North Dakota and Oklahoma have been damaged by the decline in oil prices. The Texas economy, which is larger and more diversified than that of other states, bears heightened scrutiny as tax revenue has begun to weaken.
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The statements and opinions expressed in this article are those of the author as of the date of the article, are subject to change as economic and market conditions dictate, and do not necessarily represent the views of Dreyfus, or any of its affiliates. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful.