MONEY MARKET | February 2020

Tax Exempt money market commentary

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Colleen Meehan

Senior Portfolio Manager

The Federal Reserve left its benchmark interest rate unchanged and reaffirmed it makes no moves posture while it gauges how rate cuts cushioned the U.S. economy against a spell of weaker global growth. Mr. Powell said it was too soon to assess the Chinese, global and U.S. growth due to the coronavirus and the effect it will have globally. The committee will continue to monitor economic data and will respond with policy changes when needed. The next meeting is scheduled for March 18th.

Assets in Tax-Exempt Money Market funds were range bound for most of 2019. The flat yield curve has kept the rate on Variable Rate Demand Notes attractive compared to fixed rate notes and we see continued strong demand for these securities. The securities are highly liquid and are used to meet redemptions and adjust quickly to market changes. They are priced off the weekly SIFMA index. (SIFMA Index is a weekly high-grade market index comprised of seven-day tax-exempt variable rate demand notes produced by Bloomberg LP)

Strong demand, plus limited supply, combined with the change in Fed policy resulted in a downward trend in fixed income tax-exempt yields moving the one-year index to below 1.00%. There is zero yield differential between one-year notes and five-years bonds at this point. Demand continues to remain strong for shorter maturities due to the continued flattening of the yield curve and continued strong inflows into tax-exempt funds particularly longer dated portfolios.

Higher short-term yields at year end due to anticipated year-end outflows pushed the SIFMA index higher the last two weeks of the year. This short lived back up in rates provided the funds with buying opportunities. January and February are historically very low new issuance months and a dearth of new issue supply combined with cash entering the market from reinvestment proceeds, maturities and coupon payments have kept yields depressed. The longer maturities, purchased during the final weeks of December, should buffer the decrease in yields the first few months of the year.

The midyear of fiscal 2020 for most states was December 31, 2019 and the economic and revenue outlook remained generally stable as the budget process for fiscal 2021 begins. Bolstered by the continuation of job growth and consumer spending, state budgets have benefitted from personal income tax and sales tax receipts equal to or exceeding expectations. We continue to point out the sound practices that states have implemented by employing the current revenue climate to enlarge reserve funds, should an economic downturn occur. The positive revenue picture is accompanied, however, by the lingering challenges of gaps in pension and retiree health benefits funding, the backlog of urgent infrastructure demands and Medicaid spending pressures.

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.

BNY Mellon Investment Management is one of the world’s leading investment organizations and one of the top U.S. wealth managers encompassing BNY Mellon’s affiliated investment management firms, wealth management organizations and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally. Views expressed are those of the author(s) and do not reflect

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. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Investment Adviser, Inc., Dreyfus Cash Investment Strategies (Dreyfus CIS), and BNY Mellon Securities Corporation are companies of BNY Mellon. Dreyfus Cash Investment Strategies is a division of BNY Mellon Investment Adviser, Inc. © 2019 BNY Mellon Securities Corporation, 240 Greenwich St., 9th Floor, New York, NY 10286.