Wells Fargo Asset Management writes in its latest "Portfolio Manager Commentary" about the major themes of 2017. Authors Jeff Weaver, Laurie White, et. al. tell us, "As prime funds entered 2017, their managers were still assessing the impact of the implementation of new money market regulations in October 2016, which had ultimately spurred a sector rotation of roughly $1.1 trillion out of prime and municipal funds and into government funds. As assets stabilized and managers could get back to managing, two themes dominated our year: rate movements by the Fed and asset growth in the prime sector.... For prime institutional money market funds, assets under management (AUM) began 2017 at roughly $120 billion and finished 2017 at $322 billion! With relatively stable net asset values (NAVs) and an attractive yield pickup over government funds, investors seem to be re-examining the benefits of prime funds. Our prime fund's holdings had a weighted average life (WAL) of roughly 20 days at year-end 2016 and the WALs increased to roughly 60 days by year-end 2017. In the post-reform environment, we have continued to manage our prime funds with the same conservative discipline as before reforms, adhering to a philosophy of constructing a diversified portfolio of high-quality, liquid assets to meet our clients' liquidity needs while offering an attractive risk-adjusted yield." On Municipal funds (and the recent yield spike), Wells adds, "Negative market sentiment carried over into the month of December, as the market was forced to contend with a perfect storm of record municipal supply, a looming FOMC rate hike, and abbreviated holiday trading sessions. While the final tax-reform bill ultimately turned out to be less onerous than feared, the municipal bond-making apparatus had already been set in motion. Ultimately, the total municipal volume for the month of December rose to a record $62.5 billion, up from $20.8 billion during the same time in 2016. Yields on overnight and weekly VRDNs and TOBs rapidly rose as the municipal market rapidly adjusted to accommodate burgeoning supply. SIFMA rose to a staggering 1.71%, or 115% of 1-week LIBOR, while yields on one year high-grade notes reached a high of 1.46% to finish out the year."

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