MONEY MARKET | January 2021

Tax Exempt money market commentary

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Colleen Meehan

Senior Portfolio Manager

As we begin the New Year, the federal funds target rate remains in the range of 0.00% to 0.25%. The Federal Open Market Committee (FOMC) expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment and inflation has risen to 2 percent. Several COVID-19 vaccines have received approval and are in the process of being administered around the globe; this, combined with the passage of the latest stimulus package, has brought some relief to markets. The next scheduled FOMC meeting is January 27, 2021.

The 2020 year-end in the municipal market was a smooth ending to a tumultuous year. As we enter 2021, we anticipate the same two driving factors will continue to keep demand strong and steady in the municipal market. Asset flows into long-term bond funds, and separately managed accounts, should continue to be steady and the expectations that issuance will continue to be robust as governments contend with the financial fallout of the pandemic. We believe 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 historically low interest rate levels. Both long-term and short-term markets easily absorbed the plethora of new issues with strong investor demand across the maturity spectrum during the year.

We believe new issuance in the municipal market during the first few months of the new year will be muted as issuers assess their need. Demand will likely exceed supply the first few months and will keep a lid on yields. We will continue to focus on securities that meet our maturity guidelines and credit criteria.

The prospect of Democratic control of Congress has increased the odds that the federal government will extend aid to cities and states adversely affected by the economic fallout of the coronavirus pandemic. 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 fund assets flows have been steady the past few months and we believe strong supply/demand technicals heading into 2021 will continue to keep short-term municipal market rates at historic lows. We believe the current economic and political environment will prove pivotal in 2021 as fiscal stimulus and budget concerns will highlight the sector. The programs initiated were significant in calming the markets and keeping the credit system working well, even without having much use of the facilities.

The SIFMA Index (Securities Industry and Financial Markets Association Municipal Swap 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 0.11% the past few months 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.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation. 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., Dreyfus Cash Investment Strategies (Dreyfus CIS), and BNY Mellon Securities Corporation are companies of BNY Mellon. Dreyfus Cash Investment Strategies is a division of BNY Mellon Investment Adviser, Inc. © 2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286.

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