MONEY MARKET | June 2021

Tax Exempt money market commentary

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Colleen Meehan

Senior Portfolio Manager

Federal Reserve (the “Fed”) officials strengthened their assessment of the economy at the last meeting signaling diminishing economic risks while leaving interest rates near zero and continuing the level of monthly asset purchases. In March 2020 the Fed cut short-term interest rates to near zero, launched an extensive bond purchase program and reiterated maintaining these measures until its goal of lower unemployment and 2% inflation are achieved. The next meeting is scheduled for June 16, 2021.

The month of June in the muni market will see a scarcity of bonds being chased by strong inflows from coupon payments and note and bond maturities. Strong and steady asset flows into long-term bond funds, ETF’s and separately managed accounts continue. Issuance levels have not met the steady demand keeping a lid on tax-exempt rates while keeping demand strong and steady in the municipal market. The Federal Reserve’s zero rate policy, the appetite for yield and the prospect of higher tax-levels should continue to fuel demand and enable issuers to restructure debt at historic low interest rate levels. The front end of the yield curve, securities maturing one year or less, continues to be anchored by the Fed Funds 0.0% - 0.25% rate policy and strong investor demand.

The $1.9 Trillion Covid-19 Relief bill combined with the proposed US Infrastructure bill increased volatility in yields in both the taxable and tax-exempt market as inflation expectations continue to be heightened. Optimism regarding the US economic recovery and labor market improvement remained as the continued drop in US COVID-19 cases and increased vaccine distribution have been reported.

Our experienced credit team will continue to review our current holdings and any purchases we make going forward. 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.

Municipal Money Market funds have seen assets steadily decrease due to investors moving out on the yield curve picking up higher returns as rates remain anchored. The strong liquidity characteristics of the portfolio’s and continued demand have mitigated any affect from the flows. Strong supply/demand technicals will continue to keep short-term municipal market rates at historic lows. The current economic and political environment will prove pivotal in 2021 as fiscal stimulus and budget concerns will highlight the sector.

The SIFMA Index (the 7-day high grade market index comprised of tax-exempt Variable Rate Demand Obligations reset rates that are reported to the Municipal Securities Rulemaking board weekly) has averaged 0.05% YTD. Fixed rate municipal notes continue to see strong demand with six-month notes yielding approximately 0.07%.

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.

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 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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