Tax-Exempt Funds Return Again to Negative Territory, Losing $4.11B

After a one-week blip that showed some positive growth last week - following two prior weeks of outflow activity - tax-exempt money market funds returned to negative territory, losing $4.11 billion and settling with total assets of $492.47 billion for the week ending Nov. 17, according to the Money Fund Report.

Last week, the funds gained $1.59 billion and ended with total assets of $496.58 trillion. By comparison, the funds, ended the week of Nov. 3 with $494.99 billion, down $914 million, and ended the week of Oct. 27 with $495.91 billion, down $1.96 billion.

Now that the average seven-day yields on tax-exempt money funds are dropping, some money is finding a home elsewhere, according to Connie Bugbee, managing editor of the Money Fund Report, a service of iMoneyNet.com of Westborough, Mass.

This week, the 527 tax-exempt and municipal funds in the report saw the average seven-day yield drop to 0.89% from 1.04%.

Bugbee said some of the outflows are a result of taxable money fleeing the category after temporarily parking in tax-free funds when the yields hit 5.02% back on Sept. 29. The average seven-day yield dropped to an all-time low of 0.31% back on July 14, 2003, when assets totaled $302.55 billion, according to Bugbee.

Yields are also falling in other areas of the short-term market. The Securities Industry and Financial Markets Association's weekly swap index fell to 1.14% last Wednesday, down from 1.26%, 1.82%, and 2.28% in the three prior weeks and a high of 7.96% on Sept. 24, according to Municipal Market Data.

In addition, the yield on daily variable-rate demand obligations fell slightly to a 1.11% yesterday from a 1.17% last Thursday, according to MMD. The yield on weekly VRDOs, meanwhile, increased slightly to 1.74% from 1.71% last Thursday.

Meanwhile, taxable money funds experienced positive flows, surpassing last week's record level of $3.044 trillion. The funds added inflows of $59.74 billion, ending the week of Nov. 18 with an all-time high of $3.103 trillion in total assets.

Overall, the total assets of the 1,777 money funds in the report increased by $55.63 billion to end the week of Nov. 18 with a record-high of $3.596 trillion - topping the prior record of $3.540 trillion set just last week when the funds gained $21.21 billion.

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