The latest "Municipal sector" update from Wells Fargo Asset Management's latest "Portfolio Manager Commentary," tells us, "Municipal money market yields fell back to earth during the month of January as strong seasonal reinvestment cash reignited demand for tax-exempt paper throughout the short end of the curve. An accompanying drop in new-issue supply from December's record-setting pace exacerbated the dramatic shift in market dynamics. Yields on variable-rate demand notes (VRDNs) and tender option bonds (TOBs) in the overnight and weekly space, which had experienced the highest degree of volatility during the month of December, quickly began to normalize to more reasonable ratios relative to taxables during the month. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index, which had spiked to a multiyear high of 1.71% (116% of one-week LIBOR) during the month of December, quickly shifted into downward mode. The index fell for five consecutive weeks before eventually closing out the month at 1.08% (73% of one-week LIBOR). Strong reinvestment demand extended further out on the municipal curve, driving yields on tax-exempt commercial paper, notes, and bonds lower as well. Ultimately, yields on high-grade one-year notes finished out the month at 1.40%, down from 1.46% at year-end." Wells update adds, "During the month, we continued to emphasize principal preservation and liquidity by targeting our purchases in VRDNs and TOBs with daily and weekly puts. Despite the rapid but expected drop in rates in the short end during the month, we continue to feel that this sector of the curve offers compelling nominal and after-tax return for municipal investors. Additionally, we continue to feel that a focus on liquidity and principal preservation is prudent, particularly given the relative flatness of the municipal money market yield curve and increasing prospects for further monetary policy tightening in 2018."

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