Money market fund reform is nearing its third and final compliance deadline this week and that could create unique buying opportunities in the ultra-short municipal bond space, said John Mondillo, portfolio manager for the Alpine Ultra Short Municipal Income Fund (ATOAX) - Get Report .
"Money market fund reform created an uptick in yields at the front end of the municipal bond yield curve through the first half of the year," said Mondillo about this Thursday's deadline. "As assets continue to leave institutional municipal money market funds, due to mandatory compliance with floating NAV (net asset value) and the implementation of gates and fees, it has created a vacuum of demand in the space."
As municipal money market funds experienced redemptions, it has pushed the Securities Industry and Financial Markets Association (SIFMA) Index, a barometer for 7-day tax exempt interest rates, up over 77 basis points year-to-date and to its highest levels since 2009. The reason for this increase is the structural dislocation in the municipal money market fund space. Money funds are the primary source of demand for Variable Rate Demand Notes (VRDNs), and with the sharp drop in money fund assets the market has seen a build-up of supply in dealer inventories, according to Mondillo.
The Alpine Ultra Short Municipal Income Fund is up 21 basis points thus far in 2016, according to Morningstar. The $1.1 billion fund has returned an average of 31 basis points annually over the past three years, placing it in the 92nd percentile of Morningstar's municipal national short category.
Mondillo said cautious investors in the short term space have the ability to pick up a higher yield while at the same time maintain a low duration risk profile.
"The opportunities lie in variable rate products in the muni bond space because the structural changes on the short end have increased yields in these securities," said Mondillo. "It also allows investors the ability to take more of a defensive stance headed into the election and a potential interest rate hike."