MONEY MARKET | January 2022

Tax-Exempt Money Market Commentary

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Colleen Meehan

Senior Portfolio Manager

As we enter the New Year inflation risks continue to be foremost on policy makers minds. The minutes from the December Federal Open Market Committee (FOMC) meeting discussed the need to increase the federal funds rate sooner, or at a faster pace, than anticipated. Also discussed was the reduction in the size of the Federal Reserve’s (Fed's) balance sheet relatively soon after beginning to raise rates with a commitment to address elevated inflation pressures. A stronger economy, and a stronger labor market, is great news but removes justification for the central bank to be accommodative. This has market participants increasing the odds of an increase at the March FOMC meeting. The next scheduled meeting is January 26th.

2021 saw record flows into the $4 trillion market for state and local debt. Mutual funds and Exchange Traded Funds took in approximately $97 billion during the 12 month period. Investors seeking higher yields amid historically low interest rates, combined with improved credit quality form a rebounding economy aided by billions in federal aid, kept demand steady and strong for municipal issues. The municipal market has dealt with a scarcity of bonds as issuance levels have not met the steady demand keeping a lid on tax-exempt rates but not dampening the appetite for bonds.

On November 15th, President Biden signed into law the $1.2 trillion Infrastructure Investment and Jobs Act of 2021 (IIJA) with the bulk of new spending directed towards transportation – roads, bridges and rail projects. Tax-exempt advance refundings and Build America Bonds were left out of the final bill but this is still positive for the expansion of infrastructure investment. Tax changes remain uncertain as the passage of the build back better plan debate moved into the new year. Strong state and local government tax collections and federal support have mitigated the need for short term funding during 2021 limiting issuance in the front end of the curve.

Municipal money market fund assets have remained relatively steady the past several months. Steady flows combined with the strong liquidity characteristics of the portfolios continue to provide shareholders with market returns. Strong supply/demand technicals will continue to keep short-term municipal market rates at historic lows. 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.

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.

The SIFMA Index (the 7-day high grade market index comprised of taxexempt Variable Rate Demand Obligations) reset rates that are reported to the Municipal Securities Rulemaking board weekly has averaged 0.04% year to date.

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 encompassing BNY Mellon’s affiliated investment management firms 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. Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.

This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. Views expressed are those of the author stated 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. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. 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. and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon. Dreyfus Cash Investment Strategies (Dreyfus CIS) is a division of BNY Mellon Investment Adviser, Inc. © 2021 BNY Mellon Securities Corporation , distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286.