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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 April 2014.

  • Information received since the Federal Reserve’s Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. In light of the cumulative progress toward maximum employment and an improved labor market, the Committee decided to make a further measured reduction in the pace of its asset purchases.

  • The Committee restated that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below the previously stated 6.5%. The next scheduled meeting is April 30.

  • The comments submitted to the Securities and Exchange Commission (SEC) with regard to money market reform overwhelmingly argued that tax-exempt money market funds should be excluded from any major changes given the type of investor and the high liquidity composition in tax-exempt money market funds. We will continue to update our clients on any proposed regulatory reform.

  • We continue to maintain high levels of liquidity and weighted average maturities within the industry averages.

  • The tax-exempt note market continues to experience strong demand for securities issued by municipalities. Tax-exempt securities have been relatively attractive compared to maturity-equivalent taxable securities and have continued to be an alternative for crossover buyers. Separately managed accounts and intermediate bond funds continue to purchase short-term municipal securities, as the yield curve overnight through three years is relatively flat. The yield on one-year tier one securities continues to post historical low levels.

  • Robust 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 0.09% for 2013. The first quarter of 2014 saw strong demand for this sector, keeping the index at a 0.04% average for the period, well below historical norms.

  • 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 city of Detroit filed for Chapter 9 bankruptcy in July 2013, the largest municipal bankruptcy on record. This action was not unexpected, as it is 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 has not been 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, a move the municipal market has long viewed as unacceptable. The ultimate conclusion of the bankruptcy case, which may take a lengthy 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 situation.

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.