Tax Exempt Money Market Commentary
by Senior Portfolio Manager Colleen Meehan
This is Colleen Meehan with a Tax Exempt Money Market Commentary for May, 2015
- The Fed: Not patient, but not impatient! The April 29 Federal Reserve statement discussed the transitory factors that have negatively affected economic growth during the winter and reiterated that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective. June 17 is the next scheduled meeting.
- The outlook for issuance in 2015 will be affected by the absolute low level of longer term bond rates combined with the continued rebound in refunding issuance. Demand for both short and longer term municipals continues to be robust. Short-term issuance continues to remain low as the need for short-term financing has diminished as tax receipts continue to remain strong and have supported better financial conditions for many municipalities. The yield on newly issued money-market-eligible securities continues to post historical low levels. The one-year note index is 0.18%.
- Investor demand and continued decreasing supply have kept yields on variable-rate demand notes (VRDNs) at historical lows. The SIFMA index, a weekly high-grade market index comprised of seven-day tax-exempt VRDNs produced by Municipal Market Data Group, averaged 0.05% for 2014. In the first quarter of 2015 the average maintained a historical low of 0.02%. We continue to maintain high levels of liquidity and weighted average maturities within the industry averages.
- In general, municipal credit quality has continued to improve as most states and many local governments have recovered slowly from the recession. In particular, state general funds have shown consecutive quarters of growth in personal income tax and sales tax revenue, both important sources of revenue.
- Careful and well-researched credit selection remains key. 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 healthcare and education issuers should remain stable credits.
- The industry continues to analyze the money market regulatory reforms (implementation October 2016) and the recent proposals with regard to the proposed amendment addressing the removal of credit ratings and IRS tax compliance relief.
- The City of Detroit’s Chapter 9 bankruptcy filing was the largest municipal bankruptcy on record. This action by the city was not unexpected, as it was the culmination of years of population declines, property tax base erosion and tax revenue stagnation. Fiscal distress was exacerbated by rising pension and retiree health benefit obligations. While the tax-exempt money market sector was not immediately impacted by the filing, the entire municipal market will monitor the case closely since the city has taken the unprecedented measure of viewing its general obligation bonds as unsecured debt. By doing this, the city is seeking to diminish the value of outstanding tax-supported bonds, an obligation the municipal market has long viewed as unacceptable. The ultimate conclusion of the bankruptcy case, which may take a lengthy amount of time to conclude, may establish precedent for future filings.
- Additionally, the Commonwealth of Puerto Rico has experienced economic stagnation, budget difficulties and rising pension obligations, which have led to negative ratings outlooks and declines in bond prices. This has been a highly publicized and transparent series of events.
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Past performance is no guarantee of future performance.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in a money market fund.
The statements and opinions expressed in this article are those of the authors 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. Dreyfus and its affiliates are not responsible for any subsequent investment advice given based on the information supplied.