Tax Exempt Money Market Commentary
by Senior Portfolio Manager Colleen Meehan
This is Colleen Meehan with a Tax Exempt Money Market Commentary for May, 2016
- The Federal Open Markets Committee continued their 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 market is looking at the upcoming June meeting with limited chance for a rate increase after the anemic April jobs report. The committee continues to closely monitor inflation indicators and global economic and financial developments. June 15th is the next meeting date.
- March brought some relief to yield starved investors as the Securities Industry and Financial Markets Association (SIFMA) index increased from .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 7 day tax-exempt variable rate demand notes produced by Municipal Market Data Group average year to date 2016 is 0.17% vs 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 23 days with Institutional funds posting a 16 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 in the short term municipal note market keeping yields suppressed. Short term issuance is limited as the need for financing has diminished as tax-receipts continue to remain strong and have supported 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 the 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 healthcare 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 healthcare 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.
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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.