Along with the Prime Institutional sector, Tax-Exempt institutional money funds stand to be the most impacted by the SEC Money Market Fund Reforms as they will also be required to have a floating net asset value. We take a closer look at the current state of Tax-Exempt MMFs, or "munis," and feature expert commentary on the sector from Colleen Meehan, senior portfolio manager at Dreyfus. "The tax-exempt note market continues to experience strong demand for securities issued by municipalities. Issuance continues to decline as issuers' need for short-term financing has decreased as tax receipts continue to remain strong and have supported better financial conditions for many municipalities. The yields on newly issued money-market-eligible securities continue to post historical low levels. The one-year note index is 0.14%," writes Meehan in her "Tax Exempt Money Market Commentary for November, 2014." (Note: Meehan and Dreyfus' Rebecca Glen are scheduled to speak at our upcoming Crane's Money Fund University, Jan. 22-23, 2015, in Stamford, Conn. on "Instruments of the Money Markets: Tax-Exempt Securities, VRDNs, TOBs & Muni Bonds.")

She continues, "Robust investor demand and continued decreasing supply has kept yields on variable-rate demand notes (VRDNs) at historical lows. The SIFMA index, a weekly high-grade market index comprised of seven-day tax-exempt VRDNs produced by Municipal Market Data Group, has averaged 0.05% for 2014. We continue to maintain high levels of liquidity and weighted average maturities within the industry averages. In general, municipal credit quality has continued to improve as most states and many local governments have recovered slowly from the recession."

Meehan adds, "In particular, state general funds have shown consecutive quarters of growth in personal income tax and sales tax revenue, both important sources of revenue. Careful and well-researched credit selection remains key. State general obligation bonds, essential-service revenue bonds issued by water, sewer and electric enterprises, certain local credits with strong financial positions and stable tax bases, and various healthcare and education issuers should remain stable credits."

Meehan also discusses the impacts of a high-profile bankruptcy. "The City of Detroit filed for Chapter 9 bankruptcy in 2013, the largest municipal bankruptcy on record. This action by the city was not unexpected, as it was the culmination of years of population declines, property tax base erosion and tax revenue stagnation. Fiscal distress was exacerbated by rising pension and retiree health benefit obligations. While the tax-exempt money market sector was not immediately impacted by the filing, the entire municipal market has been monitoring the case closely since the city has taken the unprecedented measure of viewing its general obligation bonds as unsecured debt."

She writes, "By doing this, the city is seeking to diminish the value of outstanding tax-supported bonds, an obligation the municipal market has long viewed as unacceptable. The ultimate conclusion of the bankruptcy case, which may take a lengthy amount of time to conclude, may establish precedent for future filings. Additionally, the Commonwealth of Puerto Rico has experienced economic stagnation, budget difficulties and rising pension obligations, which have led to negative ratings outlooks and declines in bond prices."

While the Crane Money Fund Average, which tracks all taxable MMFs, has grown by $93.0 billion since the SEC approved reforms on July 23rd, the Tax Exempt market has gone in the other direction. To date, our Crane Tax-Exempt Index has dropped $4.1 billion to $248.5 billion since the reforms were approved. Year-to-date through November 13, Tax Exempt MMF assets are down $16.4 billion. Going back almost 5 years to January 1, 2010, assets in this sector are down $143.8 billion or 36.7%. The Crane Tax-Exempt Institutional sector, which represents 2.1% of all MMF assets, has also declined. At the end of October, the Tax-Exempt Institutional sector had $53.4 billion, down $2.1 billion over the last three months and $4.1 billion since January 1, 2014. Conversely, the Crane Prime Institutional MMF market has grown by $20.8 billion since the SEC approved reforms on July 23rd.

Though Tax Exempt Institutional money funds won't be exempted from the pending floating NAV reforms (due to take effect in October 2016), Dreyfus fought hard for their exclusion. In a comment letter sent to the SEC on March 5, 2014, Dreyfus President J. Charles Cardona urged the SEC to exclude municipal money market funds from the floating NAV requirements. He wrote: "Survey evidence supports the assertion that Municipal MMFs are not used solely by individual investors. To the contrary, Institutional investors regularly invest in Municipal MMFs.... We believe the Commission should recognize that Municipal MMFs do not pose systemic risk concerns and should be treated like Government MMFs."

Crane Data shows the largest money fund manager in the Tax Exempt sector as Fidelity with $70.7 billion in assets, followed by Vanguard with $27.5B, and Schwab with $22.1B. Fourth is JP Morgan with $22.3B, followed by Federated with $17.4B, Morgan Stanley with $13.1B, Northern with $11.7B, BlackRock with $8.6B, Dreyfus with $6.1B, and Goldman Sachs with $6.1B. JP Morgan has the most Tax Exempt Institutional Assets with $12.8B, followed by Federated at $7.0B and Goldman Sachs at $5.6B.

As of October 31, our Money Fund Intelligence XLS tracked 112 Tax-Exempt Retail MMFs and 80 Tax Exempt Institutional money funds. The largest T-E Retail fund is Fidelity Municipal Money Market Fund with $28.6B in assets, followed by Vanguard Tax Exempt MMF with $17.4B, Schwab Municipal Money Fund Sweep with $10.9B, Fidelity Tax Free MMF with $9.2B, and Morgan Stanley Active Assets Tax Free with $8.0B. The largest T-E Institutional fund is JP Morgan Tax Free MM Institutional with $10.0B, followed by Federated Tax Free Obligations Institutional with $5.3B, Goldman Sachs FSq T-F MMF Inst with $5.1B, Northern Institutional Muni MM Sh with $4.7B, and BofA Tax-Exempt Res Trust with $2.6B. The largest State Tax Exempt MMF is Fidelity CA Municipal MM with $6.8B, followed by Fidelity MA Municipal MM with $6.3B, Schwab CA Municipal MF Sweep with $6.0B, Fidelity NY Municipal MM with $5.4B, and Fidelity NJ Municipal MMF with $2.4B.

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