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The Federal Reserve (the “Fed”) left interest rates unchanged at the final meeting of 2019, held on December 11. The Fed signaled it would keep interest rates on hold through 2020 amid a solid economy. The Federal Open Market Committee (“FOMC”) lowered the federal funds target rate by a quarter of a point to 1.50% - 1.75% in October, the third reduction during 2019. A much stronger than expected November jobs report supported the Fed’s decision to pause cuts to the rate for the foreseeable future. The committee will continue to monitor economic data and will respond with policy changes when needed. The next meeting is scheduled for January 29.
Assets in tax-exempt money market funds were range bound for most of 2019. The flat yield curve has kept the rate on variable rate demand notes attractive compared to fixed rate notes and we see continued strong demand for these securities. The securities are highly liquid and are used to meet redemptions and adjust quickly to market changes. They are priced off of the weekly Securities Industry and Financial Markets Association (SIFMA) Index. (The SIFMA Index is a weekly high grade market index comprised of seven-day tax-exempt variable rate demand notes produced by Bloomberg LP.)
Strong demand, plus limited supply, combined with the change in Fed policy resulted in a downward trend in fixed income tax-exempt yields moving the one year index to a 1.12%. Demand continues to remain strong for shorter maturities due to the continued flattening of the yield curve and continued strong inflows into tax-exempt funds particularly longer-dated portfolios.
As the midyear of fiscal 2020 for most states approaches, the economic and revenue outlook remains generally stable. Bolstered by the continuation of job growth and consumer spending, state budgets have benefitted from personal income tax and sales tax receipts equal to or exceeding expectations. We continue to point out the sound practice that states have implemented of employing the current revenue climate to enlarge reserve funds, should an economic downturn occur. The positive revenue picture is accompanied, however, by the lingering challenges of gaps in pension and retiree health benefits funding, the backlog of urgent infrastructure demands and Medicaid spending pressures.
Increased long term issuance coupled with year-end outflows pushed the SIFMA index higher the last two weeks of the year as anticipated. This short lived back up in rates provided the funds with buying opportunities. As we move into the New Year a dearth of new issue supply and cash entering the market as reinvestment proceeds from maturities and coupon payments will keep yields depressed. The longer maturities, purchased during the final weeks of December, should buffer the decrease in yields the first several weeks of the year.
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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. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor 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. © 2019 BNY Mellon Securities Corporation, 240 Greenwich St., 9th Floor, New York, NY 10286.