MONEY MARKET | April 2021

Tax Exempt money market commentary

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Colleen Meehan

Senior Portfolio Manager

The Federal Reserve (the “Fed”) continues to stay the course maintaining both the low rate commitment and asset management programs established last year based on their statement from the March 17th meeting. One year ago the Fed cut short-term interest rates to near zero, launched an extensive bond purchase program and continues to reiterate they will maintain these measures until its goals of lower unemployment and 2% inflation are achieved. The next meeting is scheduled for April 28, 2021.

Strong and steady asset flows into long-term bond funds, and separately managed accounts continued through the first quarter of the year. The same two driving factors seen in 2020 have continued to keep demand strong and steady in the municipal market. Expectations are that issuance will continue to be robust this year as governments contend with the financial fallout of the pandemic. The Fed’s zero rate policy, the appetite for yield and the prospect of higher taxlevels 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 recent passing of the $1.9 Trillion Covid-19 Relief bill combined with the proposed $2.25 Trillion US Infrastructure bill increased volatility in yields in both the taxable and tax-exempt market as inflation expectations dominated the market. 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.

Increased funding for state and local governments was a relief with the passage of the recent stimulus bill and several changes to the current tax plan are on the table for discussion. 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.

Tax-exempt money market funds have experienced outflows the past several months as investors move out on the yield curve to pick up higher returns as rates remain anchored. 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 0.04% the first quarter of 2021 vs 0.55% for 2020. Issuance has been met with strong demand as funds continue to maintain high levels of liquidity.

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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