A BNY MELLON COMPANY

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 March, 2015 

 The first Federal Open Market Committee meeting of the New Year was held on January 28 (March 18 next scheduled meeting). The minutes continue to suggest economic activity expanding at a solid pace with strong job gains as reflected in the lower unemployment rate. 

• Recent declines in energy prices have boosted household purchasing power, and inflation continues to decline further. There seems to be no consensus among market strategists as to the level of rates, or the timing of the first rate hike. 

• We believe 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.

• 2014 issuance decreased 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 yields on newly issued money-market-eligible securities continue to post historical low levels. The one-year note index is at 0.14%.

• 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, average for 2014 was 0.05%. We continue to maintain high levels of liquidity and weighted average maturities within the industry averages.

• In general, we believe 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 city of Detroit’s Chapter 9 bankruptcy filing, the largest municipal bankruptcy on record, was not unexpected. 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 has been monitoring 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.

• 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. 

• Please visit Dreyfus.com for additional information.

• While Dreyfus expressly did not support a “combined approach,” or a variable net asset value (VNAV) solution in any form, we are pleased that the Commission recognized the transformational nature of these reform measures and provided a two-year implementation period as well as used its best efforts to provide for tax and accounting relief that potentially, to some degree, will support the transition to a VNAV structure. If you have questions, talk with your Dreyfus Representative and check Dreyfus.com for updates. We expect to communicate with clients and shareholders frequently over the course of this compliance period. 

Investors interested in Dreyfus mutual funds should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. To obtain a prospectus, or a summary prospectus if available, that contains this and other information about a Dreyfus fund, contact your financial representative or call 1-800-DREYFUS. Please read the prospectus carefully before investing.

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.