Tax Exempt money funds jumped into the spotlight last week as yields spiked at yearend. (Municipal money fund yields jump at yearend and around April 15 as outflows and tax issues cause investors to shift large amounts of cash.) But Dan Wiener, Editor of The Independent Advisor for Vanguard Investors, warns us about the temporary nature of the jump in a brief entitled, "Soaring tax-exempt money fund yields bad for your wealth." He says, "Be forewarned, those sumptuous-looking yields on all manner of tax-exempt money funds are going to be fleeting. Because of vagaries in the municipal cash markets investors often see yields jumping at year-end on tax-exempt money funds, diverging quite a bit from the trends in the taxable markets."
He compares yields on Vanguard's tax-exempt money funds to its Prime Money Market fund in a chart, and comments, "Rising tax-exempt yields make tax-exempt money funds look a lot more attractive to investors in lower tax brackets who may think that after-tax yields will be a better bet going forward. And it's these higher yields that will appear on investors' year-end statements. Last year, for instance, my Vanguard year-end statement showed a yield on my New York Tax-Exempt Money Market of 1.55%. One month later it was down to 1.20%. Meanwhile, the taxable money fund Vanguard uses for my sweep account had seen its yield rise."
Wiener continues, "Unfortunately, the rising yields on tax-exempt money funds will begin dropping back down, fairly precipitously over the next few weeks. Investors considering moving money from a taxable money fund into a tax-exempt fund should keep an eagle eye on the bouncing yield because they'll most likely need to trade back before month's end."
Finally, he adds, "My advice: If you are currently using a money market that you've determined was best suited to your needs three weeks ago, stick with it. Nothing long-term has changed -- this is just a seasonal anomaly that will pass quickly."
For the week ended Dec. 31, our Crane Tax Exempt MF yield was up 24 bps to 1.11%. (It was unchanged on Jan. 2.) Over the past 30 days, Tax Exempt MF yields have jumped up by 85 bps. Tax Exempt assets have increased over the past week and month, but they have declined precipitously over the past decade. Currently, Tax Exempt MF assets total $143.5B, up $1.8B in the past week and up $1.5B month-to-date (through 1/2/2020).
It's been awhile since we covered the Municipal MMF world, but we wrote in our August 2017 MFI, "Mangers Flee from State Tax Exempt Money Funds." This piece says, "Though overall consolidations and liquidations in the money fund sector have slowed since money fund reforms went into effect and the Fed began raising rates, exits have continued in the Tax Exempt sector, particularly among State T-E MMFs. Just within the past two months, USAA, Schwab, Dreyfus and Western have all announced or implemented liquidations."
The article continues, "Another filing tells us, 'Effective on or about July 31, 2017, Participant shares of Dreyfus AMT-Free New York Municipal Cash Management and Dreyfus Institutional Preferred Money Market Fund will no longer be offered by either fund and will be terminated as a separately designated class of the fund.' (See the Dreyfus filing for more details)." It adds, "a filing for Western California Tax-Free Money Fund tells us, 'The fund's Board of Trustees has determined that it is in the best interests of the Fund and its shareholders to terminate and wind up the Fund.'"
More recently, we cited Wells Fargo's "Porfolio Manager Commentary" in our article, "Goldman Adds ESG Screen, Evolving; Fitch on China; Wells MMF Monthly." Wells wrote, "Yields in the municipal money market sector began to normalize following a mini spike in short-term rates during the volatile month of September. After reaching a multi-month high of 1.58% on September 25, the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index fell for five straight weeks to close out the month at 1.12%, or 67% of 1-week LIBOR." (See the latest SIFMA Index here.)
The Wall Street Journal also addressed the Muni market on Friday in, "Muni-Bond Shopping Spree Shows No Sign of Stopping." The article tells us, "Investors are heading into this year still eager for municipal bonds after a 2019 buying binge supercharged returns. High-income households looking for tax relief drove record inflows into muni-bond mutual funds last year, with the S&P Municipal Bond Index up 7.26% during the 12 months ended Dec. 31. Some analysts project that muni-bond mutual funds will continue that growth in 2020."
The article explains, "In addition to investor demand, a lack of issuance from cities and states has also driven up prices. Following a decade of tight government budgets and new limitations on borrowing, tax-exempt debt outstanding fell slightly in the roughly $4 trillion bond market. Municipal borrowers, barred by the 2017 tax overhaul from accessing the tax exemption for certain early refinancings, instead sold taxable debt, doubling last year's taxable issuance to about $65 billion and draining tax-exempt bonds from the market. Expectations of continued low rates around the world have left investors willing to pay handsomely for muni bonds, including those that don't throw off tax-exempt interest."
The Journal continues, "There remains a rising risk of volatility, some analysts say, as the growing concentration of municipal bonds in mutual funds reflects changes in buying habits. American households are increasingly buying shares of funds, rather than holding bonds outright. At the same time, other longtime institutional investors in munis -- such as banks and insurance companies -- reduced their holdings after the 2017 law cut their tax rates.... After 12 straight months of inflows, it is hard to predict when the march of investors into muni-bond funds will end, but it will, said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities."
For more on the Tax Exempt Money Fund marketplace, see these News articles: JPMorgan Latest to File for Inst Tax Free MMF; NY Fed on Safe Assets (11/28/17), Schwab Simplifies MMF Lineup, Lowers Minimums; Federated Muni Exit (10/25/17), and Dreyfus Liquidating AMT-Free MMF (8/1/17).
