MONEY MARKET | June 2019
Tax Exempt money market commentary
Director of Tax-Exempt
Money Market Fund Strategies,
BNY Mellon CIS
The minutes from the May 1 Federal Open Market Committee (FOMC) meeting restate that the committee’s patient approach to future interest-rate adjustments would be appropriate for some time. The federal funds target range was held steady at 2.25%-2.50%. FOMC Chair Jerome Powell has said that the central bank is monitoring the recent escalation in trade tensions and would react as appropriate to keep the expansion going. The next meeting is scheduled for June 19, 2019.
Tax-Exempt money market funds saw large outflows towards the end of April as payments for the 2018 tax bills came into play. The Securities Industry and Financial Markets Association (SIFMA) Index began the month at 1.48% and ended it at 2.30% as funds sold these securities to meet redemption demands. The markets stabilized in May as demand for taxexempt money market securities increased. These securities are highly liquid. (The SIFMA Index is a weekly high grade market index comprised of seven-day tax-exempt variable-rate demand notes produced by Bloomberg LP.)
Supply and demand continue to drive the SIFMA Index: the average for the first five months of the year was 1.60%. The index averaged 1.42% for 2018.
Strong demand, plus limited supply, combined with the change in Federal Reserve policy during the first quarter of 2019 resulted in a downward trend in fixed income tax-exempt yields, moving the one-year index level down from 2.00% to 1.50%. Demand continues to remain strong for shorter maturities due to the continued flattening of the yield curve and the strong inflows into tax-exempt funds, particularly longerdated portfolios. Annual cash borrowings should increase in the coming months and should put pressure on yields one year and in.
A number of states are finalizing budgets for fiscal year 2020 as the economy remains generally strong. Spending priorities among the states include augmenting reserve funds to counter a future economic slowdown, teacher salary increases, funding pension liabilities and addressing infrastructure needs. States and municipalities await any progress on a federal infrastructure program, but in the meantime are considering hikes in state gas taxes to fund serious needs.
Early concerns about personal income tax collections seem to have subsided as receipts during the final days of the tax collection season appear to have met or exceeded expectations, particularly in California, where April collections surpassed estimates.
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