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The Federal Reserve Open Market Committee (“FOMC”) held the regularly scheduled meeting on November 5 and continued to state the pandemic poses considerable risks for the U.S. economy despite recent gains and will continue to provide sustained stimulus. The federal funds target rate in a range of 0.00% to 0.25% remains in place, and the 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. The most recent labor market data saw the jobless rate fall to 6.9%.
Tax-exempt money market funds asset flows have seen a slow drip out of money market funds into investments with higher returns. This is anticipated as rates remain low consistent with the current interest rate environment. Strong supply/demand technicals continue and are keeping short-term municipal market rates at historic lows, and investors have been moving money to longer term municipal investments capturing higher yields across the maturity spectrum. We believe the current economic and political environment will prove to be pivotable in 2021 as fiscal stimulus and budget concerns will highlight the sector.
The Securities Industry and Financial Markets Association Municipal Swap Index (“SIFMA Index”) has averaged 0.12% in July through September versus 0.59% year to date. Issuance has been met with strong demand as funds continue to maintain high levels of liquidity and quarter-end flows were muted.
The market, both long term and short term, has absorbed a plethora of new issues with strong investor demand. As we enter the last several weeks of 2020, we continue to see issuers come to market before year end. 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.
The Municipal Liquidity Facility (“MLF”) put in place by the Federal Reserve (the “Fed”) in April allows 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. To date, the only state to use the MLF is Illinois, but Hawaii and New Jersey have authorization in place to do so. This does not mean that they will use the MLF, but the option is there. In August, the New York Metropolitan Transportation Authority (“MTA”) used the MLF. While the MTA did have access to the market, it was advantageous to use the MLF due to the pricing structure as it applied to their ratings. Federal legislation providing additional state and local aid is currently stalled, which will result in many issuers resorting to tax increases and/or spending cuts to achieve budgetary balance.
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.
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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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