Wells: Volatile Start for Muni MMFs
Wells Fargo Money Market Fund's latest "Portfolio Manager Commentary" tells us, "Municipal money markets got off to a volatile start this year as strong initial asset inflows gave way to exceptionally large redemptions during the latter half of the month. Yields on variable-rate demand notes (VRDNs) and tender option bonds (TOBs) in the overnight and weekly space responded in dramatic fashion to the sudden swings in demand. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index, which had closed out 2018 at 1.71% (71% of 1-week LIBOR), quickly fell to 1.28% (53% of 1-week LIBOR) as strong seasonal demand overwhelmed available supply during the first two weeks of the month (as of January 14, 2019). Yields on overnight high-grade paper fell even more dramatically, falling from roughly 1.70% to as low as 0.85% (as of January 14, 2019). However, after the initial surge in seasonal demand was satisfied, the municipal money market was left vulnerable due to the richness of tax exempt issues relative to taxable paper." Author James Randazzo adds, "Municipal money market funds would eventually experience roughly $5 billion in redemptions over the last two weeks of January, causing a sharp reversal in the direction of rates in the short end of the curve. As a result, the SIFMA Municipal Swap Index closed out the month at 1.43% (59% of 1-week LIBOR), while overnight rates spiked to as high as 1.65%, nearly double levels seen earlier in the month. In contrast, the long end of the curve was relatively stable. With strong demand for high-grade one-year paper carrying over into the new year, exerting steady downward pressure on rates, the municipal money market yield curve flattened further as rates on one-year paper fell to roughly 1.74% from 1.90% at year-end. During the month, we continued to emphasize principal preservation and liquidity by targeting our purchases in VRDNs and TOBs with daily and weekly puts."
