MONEY MARKET | October 2021

Tax-Exempt Money Market Commentary

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Colleen Meehan

Senior Portfolio Manager

The Federal Open Market Committee (FOMC) meeting held on September 22nd heard Chair Powell say the US central bank could begin scaling back asset purchases in November and complete the process by mid2022 with an inclination to raise interest rates next year. The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25%. Inflation was 4.2% in the 12 months through July, well above the central bank’s 2% target. Many Federal Reserve (Fed) officials have said they expect it to return to around 2% after temporary supplychain disruptions resulting from the pandemic have been resolved, though several have also cited the rapid price increases as a reason to begin raising rates as early as next year. November 3rd is the next scheduled meeting.

As we enter the fourth quarter of 2021, we see issuance ticking up as issuers continue to tap the current low rate environment to issue longer term debt. The municipal market has dealt with a scarcity of bonds and strong and steady asset flows into long-term bond funds, ETF’s and separately managed accounts. 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 Fed’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.

Ongoing discussions regarding an infrastructure package have kept tax-exempt investors and issuers busy as the many adjustments and programs discussed could affect the level of new issuance and different types of securities used for funding. Strong state and local government tax collections and federal support have mitigated the need for short-term funding limiting issuance in the front end of the curve. Stay tuned as we will continually provide updates as things move forward.

Municipal money market funds have seen assets remain relatively flat during the summer driven by the limited new issue supply. 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 current economic and political environment will prove pivotal in 2021 as fiscal stimulus and budget concerns will highlight the sector.

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 tax-exempt 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.

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