Insights & Ideas

Tax Exempt Money Market Commentary

by Senior Portfolio Manager Colleen Meehan

Colleen Meehan

This is Colleen Meehan with a Tax Exempt Money Market Commentary for June 2016 

  • The May employment numbers showed employers adding the fewest number of workers in almost six years, raising concerns about U.S. growth which may prompt Federal Reserve policymakers to put off an increase in interest rates.
  • The Federal Open Market Committee continued its cautious approach to the near-term policy outlook at the April 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. June 15 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 0.40% average for April. 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 0.21% 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.
  • Issuance continues to be the main driver keeping yields suppressed in the short-term municipal note market. Short-term issuance is limited as the need for financing has diminished as tax receipts continue to remain strong and support better financial conditions for many municipalities. The outlook for higher interest rates, combined with money market reform, has increased the one-year note index as investors stay in highly liquid, short paper. The one-year note season has remained steady as issuers assess their annual financial needs. We expect issuance to pick up the next few months and also expect the one-year index to rise. The one-year index has increased approximately 45 basis points from last year.
  • 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 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.