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MONEY MARKET | February 2023

Tax-Exempt Money Market
Commentary

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John Tobin

Colleen Meehan

Director of Tax-Exempt Money Market Funds

The first Federal Open Market Committee (FOMC) meeting of 2023 concluded February 1 where the FOMC raised the federal funds rate 25 basis points to a range of 4.50% - 4.75%. Federal Reserve (Fed) Chair Jerome Powell discussed the need for additional rate hikes to reach an appropriately restrictive level. Recent inflation data point to lingering inflation. Markets now anticipate higher-for-longer rates. The 10-year US Treasury Note reached a 3.92% yield as of February 28 versus the February 2 low of 3.40%. The next meeting is scheduled for March 21 and 22.

Supply/demand dynamics continue to drive Securities Industry and Financial Markets Association (SIFMA) Index volatility, a seven-day high-grade market index reported to the Municipal Securities Rulemaking Board. The month of February saw a swing of approximately 200 basis points. Tax-exempt money market fund yields increased over the past several months amid the Fed’s path to higher interest rates; however, yields remained low as the market, starved for new issuance, put cash to work in the front of the yield curve. Investment in municipal money market funds increased driven by attractive yields and the stability of the money market space. The front end of the yield curve (i.e., securities maturing within one year) yields drifted down in the face of strong demand across the yield curve. We will continue to maintain high levels of liquidity with variable rate security indexes trending higher and seek to provide shareholders with competitive market returns.

The lack of new issuance, combined with an increase in appetite for tax-exempt income, saw demand rise as we entered the new year. This is historically a period where demand outpaces supply, keeping a lid on tax-exempt yields. As issuers enter the market in the next few months, we will see investors move out on the curve to pick up yield and the short-term money market space will move more in line with historical norms. Demand continues to remain strong for shorter-dated paper as investors stay in the shorter end of the market.

As the economic outlook worsened states passed fiscal year (FY) 2023 general fund spending of $1.16 trillion, a 6.7 percent increase over FY 2022, per the National Association of State Budget Officers (NASBO). The pace of spending growth declined considerably from 18.3% in FY 2022, the highest annual increase in spending since 1979. State revenue projections in FY 2023 enacted budgets are 3.1% below preliminary actual collections for FY 2022, but more recent revenue data suggest that revenue will continue to grow in FY 2023, with 33 states reporting collections exceeding budget forecasts. State rainy day fund balances continued to grow in FY 2022 after increasing 58 percent in FY 2021, and the median balance as a share of general fund spending is projected to be 11.9 percent in FY 2023. We believe states are well positioned to weather the upcoming recession, although the actual impact will be determined by its depth and severity.

Our experienced credit team will continue to review our current holdings and any purchases we make going forward. All the securities purchased receive a minimal credit risk designation prior to purchase and are periodically reviewed for any changes to the credit outlook. We continue to maintain very high grade, liquid portfolios.

All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

BNY Mellon Investment Management is one of the world’s leading investment organizations encompassing BNY Mellon’s affiliated investment management firms and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

Municipal income may be subject to state and local taxes. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable.

This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forwardlooking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

BNY Mellon Investment Adviser, Inc. and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon. Dreyfus is a division of BNY Mellon Investment Adviser, Inc (BNYMIA). ©2023 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286.

MIC-358573-2023-03-09