Senior Portfolio Manager
The Federal Reserve Open Market Committee (“FOMC”) held the regularly scheduled meeting on July 29, and, as expected, voted to keep the federal funds target rate in a range of 0.00% to 0.25%. The minutes from the July FOMC meeting showed official believe more government spending would be needed to prevent a longer or deeper downturn amid difficulties states have faced in suppressing COVID-19. The Federal Reserve (the “Fed”) responded aggressively to the pandemic shock by expanding its asset holdings by nearly $3 Trillion to $7 Trillion after slashing rates to zero. The next scheduled FOMC meeting is September 16.
Tax-exempt money market funds asset flows have decreased the past few months as rates remained low during this interest rate environment. Interest for short-term securities is strong and continues to keep a lid on rates as the market has stabilized. Strong supply/ demand technicals continue and are keeping short-term municipal market rates at historic lows and investors have been moving money to longer term municipal investments capturing higher yields across the maturity spectrum.
The Securities Industry and Financial Markets Association Municipal Swap Index (“SIFMA Index”) has averaged 0.12% in July and August versus 0.74% year to date. Issuance has been met with strong demand as funds continue to maintain high levels of liquidity.
The summer months provided the market with a plethora of new issues, both long-term and shortterm, and they were met with strong investor demand. We anticipate issuance in the short-term market will increase in the coming months as states and local governments review and balance their budgets, adjusted by the change to economic projections and increased spending. Our experienced credit team will continue to review our current holdings and any purchases we make going forward in our portfolios. All of the securities purchased receive a minimal credit risk designation prior to purchase, and are periodically reviewed for any changes to the credit outlook. We continue to maintain very high grade, liquid portfolios.
The Municipal Liquidity Facility (“MLF”) put in place by the Fed in April allows states, counties and cities to use the proceeds of notes purchased to purchase similar notes issued by, or otherwise to assist, other political subdivisions and governmental entities. The criteria to participate in the program has been tweaked several times in order to include a broader number of municipalities. To date, the only state to use the MLF is Illinois, but Hawaii and New Jersey have authorization in place to do so. This does not mean that they will use the MLF, but the option is there. In August, the New York Metropolitan Transportation Authority used the MLF. While the MTA did have access to the market, it was cheaper to use the MLF due to the pricing structure as it applied to their ratings. Federal legislation providing additional state and local aid is currently stalled, which will result in many issuers resorting to tax increases and/or spending cuts to achieve budgetary balance.
All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.
Municipal income may be subject to state and local taxes for out-of-state residents. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.
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Views expressed are those of the author(s) and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change.
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