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 August, 2015 

  • Information received since the Federal Reserve’s Federal Open Market Committee met in June suggests that economic activity has expanded moderately in recent months. The labor market continued to improve, with solid job gains and declining unemployment. Market consensus continues to see the first increase in the federal funds rate in 2015. The next scheduled meeting is September 17. 

  • Issuance continues to be the main driver in the short-term municipal market, keeping yields anchored at record lows. Short-term issuance is below 2014 levels, 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 outlook for higher yields combined with money-market reform has increased the one-year note index off of historical lows. This year’s note season has been well received from investors and, as anticipated, has moved the one-year index approximately 20 basis points from last year. 

  • Investor demand, and continued decreasing supply, has 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 and year-to-date 2015 is 0.05%. 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, and reserve balances have grown to pre-recession levels. The degree of recovery by region, however, remains varied. 

  • 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 commonwealth of Puerto Rico continues to face financial, economic and liquidity difficulties. Restructuring of the commonwealth’s total debt burden of $72 billion remains a possibility, although Puerto Rico still has no formal framework under which any of its entities may file bankruptcy. Various revenue enterprises may negotiate debt-relief measures directly with bondholders, an undertaking currently under way with the island’s Electric Power Authority.  

  • The economic recovery in California has been sufficiently robust that cash-flow borrowing by the state will not be necessary for the first time in many years. We are cautious, however, about municipal water systems in the state, which may be stressed by severe drought related water restrictions. Additionally, the state of Texas has announced that it will not issue cash-flow notes for the first time since 1987.

  • Unfunded pension obligations remain a concern for some municipalities, such as the city of Chicago and related entities. This problem and its solution have also plagued the state of Illinois.

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.