Wells Fargo Money Market Funds writes its monthly, "Overview, strategy, and outlook," "It was a long time coming, but yields in the municipal money market space finally adjusted higher in dramatic fashion during March. While yields in the taxable space responded promptly to the Fed's first tightening in monetary policy back in December, yields in the tax-exempt space had remained stuck at historical lows through the first two months of the year due to the persistence of an acute imbalance between supply and demand for variable-rate demand notes, tender option bonds, and other short-term municipal instruments. However, market dynamics were subject to a staggering reversal as municipal money market funds experienced roughly $15 billion in outflows in March. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index which had seemingly been frozen in time at 0.01%, rose sharply to 0.40% -- its highest level since 2009. While it is quite typical for municipal money market yields to lag their taxable counterparts, history has shown the ensuing recalibration in the tax-exempt space is often sudden -- particularly during times of seasonal weakness in demand. Municipal money market funds usually experience tax-payment-related outflows during the March–May time frame, which result in temporarily elevated tax-exempt rates." It continues, "This year, however, money market fund reform–related outflows, as well as liquidations in the municipal money market space, may have contributed to an accelerated surge in the SIFMA Municipal Swap Index. Dealers were quickly forced to competitively price tax-exempt paper in order to attract crossover buyers and reduce swelling inventory levels.... During the month, we continued to focus our investments in the overnight and weekly sectors in order to emphasize principal preservation and overall portfolio liquidity. As we had positioned our portfolios for what we considered to be an inevitable adjustment in tax-exempt/taxable ratios, we were subsequently rewarded for our patience in waiting for SIFMA to rise. As such, we continued to maintain relatively low weighted average maturities across our municipal funds during the month and continued to opportunistically purchase high-grade commercial paper, notes, and pre-refunded bonds in the one-month to three-month range for diversification purposes."

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