Tax-Exempts See $1.96B of Outflows as Taxables Gain

While taxable money market funds are still seeing healthy inflows, tax-exempt funds suffered outflows of $1.96 billion for the week ending Oct. 27 - a stark comparison to last week's inflows of $7 billion and the gains of the last three weeks in general, according to the Money Fund Report, a service of iMoneyNet.com of Westborough, Mass.

The 534 tax-exempt funds ended the week with $495.91 billion in total assets, down slightly from the $497.86 billion they accumulated last week after amassing inflows of $7 billion amid increased demand and liquidity in the short-term market.

The average seven-day yield for the funds dropped to 1.81% from 2.54% after declining from 3.36% the prior week and a recent high of 5.02% at the end of September. The average maturity declined to 29 days from 30 days over the period.

A New York short-term trader said the outflows in tax-exempt money funds over the last week were nothing more than typical month-end losses, and that, overall, there is growing demand.

"Money funds have repositioned themselves," she said. "There were some outflows, but nothing major - we should see some more money coming in at the beginning of the month."

Yields in the short-term market continued to fall in the last seven days, and the municipal market overall saw mixed trading following Wednesday's move by the Federal Open Market Committee to lower its federal funds rates target by 50 basis points to 1.00%. Tax-exempt yields ended slightly lower on the short end of the market, and slightly higher on the long-end, after being higher across the board by about two or three basis points prior to the cut, traders reported this week.

The SIFMA weekly swap index - a key barometer for the short-term market - has continued to decline in recent weeks. For instance, the index dropped to a 2.28% last Wednesday, down from 3.45%, 4.82%, and 5.74% in the three prior week after a Sept. 24 high of 7.96%, according to Municipal Market Data.

Meanwhile, the yields on daily general market variable-rate demand obligations fell to 1.36% yesterday, down from 1.56% last Thursday, and 2.02% the prior week, according to MMD. The yields on weekly general market variable-rate demand obligations fell to 2.44% yesterday, after ending at 2.93% last Thursday, a noticeable drop from 3.93% the week before.

The continued decline in short-term rates - aided by this week's Fed rate cut - is a signal that investors are beginning to rebuild their trust in the money funds, the New York short-term trader said.

"People are confident that the money funds are not going to go belly-up, so there is confidence there," she said.

Taxable money markets remained in positive territory, but their level of growth paled in comparison to last week's activity.

The 1,286 taxable funds in the report gained $6.37 billion for the week ending Oct. 28, bringing total assets to $2.981 trillion. That was substantially less when compared to the whopping $19.45 billion of inflows that poured into the funds the previous week when they ended with total assets at $2.97 trillion.

The average seven-day yield on the taxable funds increased to 1.54% from 1.45% last week.

Overall, the 1,820 tax-exempt and taxable money market funds in the report posted combined total assets of $3.47 trillion for the week ending Oct. 28 after gaining $4.41 billion, but total assets remained the same as last week's $3.47 trillion, according to the report. However, inflows were down substantially from $26.46 billion last week and $58.38 billion in the prior period.

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