Tax Exempt Money Market Commentary
by Senior Portfolio Manager Colleen Meehan
This is Colleen Meehan with a Tax Exempt Money Market Commentary for October 2016
- As expected, the Federal Open Market Committee left rates unchanged at its September 21 meeting. November 2 is the next scheduled meeting and it falls ahead of the presidential election, so the odds are against any movement. The market is looking for another December holiday present in the form of a 25-basis-point increase, barring any surprising economic indicators.
- With the October 14 money market reform compliance date in our sights, short and liquid continues to be the theme in the money market industry. We continue to maintain extremely high levels of liquidity in preparation for the anticipated cash movement. The funds are structured to meet the new regulatory mandates taking effect.
- The Securities Industry and Financial Markets Association (SIFMA) index continues to increase steadily, beginning the year at 0.01% and reaching the current level of 0.84% (as of to 9/28/16). The SIFMA index is a weekly high grade market index comprised of seven-day tax-exempt variable-rate demand notes produced by Municipal Market Data Group. The 2016 year-to-date average is 0.34% vs. a 0.05% average for 2015. We expect these levels to remain attractive compared to similar taxable investments as we head into the fourth quarter.
- 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-term bond funds and long-term bond funds has picked up as that sector of the market has seen continued asset inflows. The current tax-exempt yield curve is relatively flat one-year out to five-years, making one-year notes very attractive to this segment of the market.
- 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. However, the degree of recovery continues to vary by region. 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 State of Illinois, in fact, has suffered multiple downgrades of its general obligation bond ratings.
- 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 other states, bears heightened scrutiny as tax revenue has begun to weaken.
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Past performance is no guarantee of future performance.
The Dreyfus Corporation is the primary mutual fund business of BNY Mellon. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. MBSC Securities Corporation, a registered broker-dealer, member of FINRA and subsidiary of Dreyfus, is the distributor of Dreyfus mutual funds.
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.