Tax Exempt money market commentary

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Colleen Meehan

Director of Tax-Exempt
Money Market Fund Strategies,
BNY Mellon CIS

The Federal Open Market Committee (FOMC) reiterated at the May1st h meeting that they will be patient on any future interest rate moves. The target range was held steady at 2.25% - 2.50%. Federal Reserve officials confirmed that economic activity rose at a solid rate and the unemployment rate has remained low. The next scheduled meeting is June 19, 2019.

Tax-Exempt Money Market funds saw large outflows towards the end of April as payments for the 2018 tax bills came into play. The Securities Industry and Financial Markets Association (SIFMA) Index began the month at a 1.48% and ended at a 2.30% as funds sold these securities to meet the redemption demands. These securities are highly liquid. (SIFMA Index is a weekly high grade market index comprised of seven-day tax-exempt variable rate demand notes produced by Bloomberg LP)

Supply and Demand continues to drive the SIFMA Index the average for the first four months of the year was 1.64%. The index averaged 1.42% for 2018.

Strong demand, plus limited supply, combined with the change in Fed policy during the first quarter resulted in a downward trend in fixed income taxexempt yields moving the one year index level down from 2.0% to a 1.60%. Demand continues to remain strong for shorter maturities due to the continued flattening of the yield curve and the strong inflows into tax-exempt funds particularly longer dated portfolios. Annual cash borrowings should increase in the coming months and should put pressure on yields one year and in.

A number of states are finalizing budgets for fiscal 2020 as the economy remains generally strong. Spending priorities among the states include augmenting reserve funds to counter a future economic slowdown, teacher salary increases, funding pension liabilities and addressing infrastructure needs. State and municipalities await any progress on a federal infrastructure program, but in the meantime are considering hikes in state gas taxes to fund serious needs.

Early concerns about personal income tax collections seem to have subsided as receipts during the final days of the tax collection season appear to have met or exceeded expectations, particularly in California, where April collections surpassed estimates.

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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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