MONEY MARKET | June 2020

Tax Exempt money market commentary

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Colleen Meehan

Senior Portfolio Manager

The Federal Reserve Open Market Committee (FOMC) held the regularly scheduled meeting on June 10 and voted to keep the federal funds target rate in a range of 0% to 0.25%. The U.S. Federal Reserve (the “Fed”) pledged to maintain asset purchases at “at least” the present pace and projected interest rates will remain near zero through 2022 as policy makers attempt to support the economy’s recovery from the COVID-19 recession. The next scheduled FOMC meeting is July 29. We have been through the rescue phase and we are now in the transitional reopening phase and hopefully the next phase will be a growth incentive phase for the future economy.

On April 9, the Federal Reserve Board announced the Municipal Liquidity Facility (MLF) allowing states, counties and cities to use the proceeds of notes purchased to purchase similar notes issued by, or otherwise to assist, other political subdivisions and governmental entities. The criteria to participate in the program has been tweaked several times in order to include a broader number of municipalities. Under the MLF, the Fed will commit to lend to a special purpose vehicle (SPV) on a recourse basis. The SPV will have the ability to purchase up to $500 billion of eligible notes. The State of Illinois was the first to tap the program for funding as their credit profile would have seen costs exceed the benefit that this program provided. The potential impact of this program and additional funding needs will be determined over the next few months as the June 30 budget deadline approaches for many.

Assets flows have been steady in tax-exempt money market funds as rates remained comparable to similar taxable funds and provide diversification for investors. Rates increased dramatically in March in response to the dislocation in the markets and have continued to decline due to strong demand. Interest for short-term securities is strong and continues to keep a lid on rates as the market has stabilized. Strong supply and demand technical propelled the short-term municipal market to historic lows as rates moved in line with similar taxable maturities.

The Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA Index) saw stabilization in rates for several weeks as it reacted to asset shifts with the rates increasing from 1.28% to a 5.30% and resetting on May 27 at 0.14%.

The new issue market had been virtually halted during March, but new issues came to the market during the past two months as issuers got back to business. The new issues were met with strong investor demand. We anticipate issuance in the shortterm market will increase in the coming months as states and local governments review and balance their budgets adjusted by the change to economic projections and increased spending. Our experienced credit team will continue to review our current holdings and any purchases we make going forward in our portfolios. 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.

It will take some time to assess the long-term effect the COVID-19 pandemic will have on municipal credits. Many are hopeful that the economic effects will be temporary, and that the programs put in place by the federal government will mitigate these effects. The Federal Reserve has implemented many programs to assist with financial management during this crisis, including purchases of municipal securities across the maturity spectrum which helped stabilize the market.

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.

Views expressed are those of the advisor 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.

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