Wells MMFs on Municipal Sector
Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" discusses a number of topics, but we focus on their "Municipal Sector" comments. They tell us "New Year's Eve, marking the close of one decade and the debut of another, was a celebration worthy of fireworks, but they were conspicuously absent in the money markets. Just as yearend came and went without a hint of dislocation, January also passed with barely a whisper of volatility, demonstrating the effectiveness of a Federal Reserve (Fed) committed to reining in the repo market.... The short end of the municipal money market space continued to exhibit a high level of volatility as seasonal flows resulted in a roller-coaster ride for rates on variable-rate demand notes (VRDNs) and tender option bonds (TOBs). The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index, which had spiked to 1.61% (99% of 1-week LIBOR) to close out 2019, quickly fell to 0.80% (51% of 1-week LIBOR) as strong seasonal demand overwhelmed available supply during the first two weeks of the new year. Yields on overnight high-grade paper fell even more dramatically, falling from roughly 1.65% to as low as 0.45%." Wells explains, "Municipal money market funds were the recipients of approximately $4 billion in inflows during the first week of the month, according to Crane Data. However, as the month progressed, municipal money market funds eventually experienced consistent outflows that erased the early-month gains. Accordingly, rates began to normalize, with the SIFMA Index gradually rising before closing out the month at 0.94% (60% of 1-week LIBOR). Overnight rates spiked to as high as 1.15% at month-end, more than double levels seen earlier in the month. Further out on the curve, strong demand for high-grade one-year paper carried over into the new year, exerting consistent downward pressure on rates. Yields in the one-year space closed out the month at roughly 0.95%, down from roughly 1.15% at the end of December. Continued strong inflows into municipal bond funds are still contributing to downward pressure on rates across the curve." The piece adds, "During the month, we continued to focus our purchases primarily in VRDNs and TOBs with daily and weekly puts in order to emphasize principal preservation and fund liquidity. The municipal money market yield curve remains relatively flat, and we have remained highly selective in deploying cash for investments further out on the curve. We continue to feel that the short end of the municipal yield curve offers value in terms of attractive nominal and after-tax returns for municipal investors."
