A Fed of few words

Market outlook

We expect the Federal Open Market Committee (FOMC, the Fed or Committee) to keep its key policy rate unchanged in the near term but acknowledge the possibility of a modest upward adjustment in rates prior to year end should inflation stay elevated.

We will also be looking for signals about potential changes to the Fed’s balance sheet policy and communication strategy under new Chair Kevin Warsh, but don’t expect any material adjustments in the near term.

Net T-bill supply should be comfortably absorbed during the third quarter, in our view, as abundant bank reserves and high levels of cash held across the money market fund industry should help support stable funding conditions for Treasury and mortgage-backed securities collateral.

Q2 highlights

The FOMC kept the federal funds target rate unchanged in a range of 3.50% to 3.75% during the second quarter of 2026. Kevin Warsh took over as Federal Reserve Chair in time for the June meeting from Jerome Powell, who stayed on the FOMC as a Fed governor.

The statement¹ released in conjunction with the June meeting was significantly shortened relative to statements following recent meetings. Information on the “balance of risks” and regarding participants who voted for or against the decisions taken by the Committee were omitted.

Following the April meeting, where three members of the FOMC dissented over the inclusion of an “easing bias,” the June statement² simply noted that the “Committee will deliver price stability.” The statement was also updated to note that “the Committee reaffirmed its policy of maintaining ample reserves in the banking system.”

The median federal funds rate forecast contained in the quarterly Summary of Economic Projections (SEP) for 2026,³ released in conjunction with the June 17 FOMC meeting, rose to 3.8% from the 3.4% projection released in March 2026. Chair Warsh said in his post-meeting press conference that he did not submit an interest rate forecast.

The updated SEP for 2026 reflected higher core and headline inflation projections, as well as a slightly lower unemployment rate and economic growth forecast, relative to March 2026.⁴

Net T‑bill supply declined by $89.5 billion during the second quarter,⁵ while overnight Reverse Repurchase Agreement utilization remained modest, averaging $326.3 billion over the course of the quarter.⁶

Assets across the U.S. money market fund (MMF) industry increased $85.6 billion during the quarter. Tax-exempt and government MMFs rose by $2.5 billion and $99.6 billion, respectively, while prime MMFs experienced a decline of $16.5 billion.⁷

BlackRock government MMFs saw tax-related and early-June outflows as well as inflows in May and late June, while industry assets remained near all-time highs.

The FOMC kept its policy rate unchanged during the quarter, including at its first meeting under Chair Warsh, while communications continued to emphasize elevated inflation and geopolitical uncertainty.

Front-end Treasury bill yields generally moved higher. The 4-month Treasury bill ended the period 18 basis points (bps) higher at 3.88%.⁸ The 6-month Treasury bill ended the period 26 bps higher at 3.98%.⁹ The 12-month tenor increased 30 bps, finishing the period at 3.97%.¹⁰

Weighted Average Maturities (WAM) in our government funds were managed cautiously as uncertainty around Fed policy, inflation and Middle East events persisted. At the start of the quarter, WAMs were near 49 days for repurchase agreement (Repo) eligible funds and 38 days for non-repo funds.¹¹ By the end of the quarter, these figures were 44 and 28 days, respectively, with the team positioning portfolios for the evolving 2026 rate path.

Purchases continued to focus on Treasury bills (T-bills), with weekly updates showing activity across shorter tenors as conditions evolved. Purchases were mostly comprised of 2 to 12-month T-bills at average yields of 3.65% to 3.86%.¹²

Treasury issuance in the second quarter trended higher and supply was skewed towards coupons, with around $411 billion coming to market by the end of June. T-bill supply contracted around federal tax dates and began to edge higher later in the quarter.

SOFR traded in a relatively narrow range during the quarter, reflecting healthy liquidity and stable conditions in short-term funding markets. After softening in May amid abundant cash balances, funding rates edged higher into June due to seasonal cash-flow dynamics and increased Treasury market activity.¹³

We expect the FOMC to remain cautious while inflation, employment and geopolitical risks remain uncertain. Net T-bill supply began to rise after the tax-related contraction, and the expected additional supply should be well absorbed. We are focused on maintaining a cautious duration profile as the path of monetary policy evolves.

In contrast to the increase in assets of prime MMFs across the industry, BlackRock prime MMFs experienced net outflows for the second quarter.

Spreads between prime and government money market funds remained near long-term averages, signaling a balanced yield environment.¹⁴

Tier 1 Commercial Paper (CP) outstandings decreased by $8.5 billion to $407.2 billion by the end of the quarter. As expected, CP rates continued to be repriced in line with expectations for the future path of monetary policy. Fixed-rate investments with final maturities of 1 week to 1 year were added to eligible portfolios at yields of 3.50% to 4.42%. Floating-rate investments with maturities of 3 months to 1 year were added at spreads of 0.08% to 0.50% over SOFR.¹⁵

Other purchases during the period were primarily in certificates of deposit (CD), time deposits and overnight repo for eligible portfolios.¹⁶

Throughout the quarter, our focus remained on investing in a mix of longer-dated fixed-rate securities and floating-rate securities where we viewed yields as attractive. Our particular focus was on high quality bank issuers and related short-term credit opportunities. At the end of June, our target WAM range was 36 to 40 days, and the funds had an average weekly liquidity of approximately 52%.¹⁷

We will continue to selectively add a mix of fixed- and floating-rate exposure as the Fed rate path continues to be reassessed by markets. Additionally, we believe there is a need for heightened geopolitical caution, and we remain selective when adding credit risk. We remain flexible amid evolving interest-rate expectations and market volatility. 

Tax-exempt money funds saw inflows for the second quarter of 2026, ending the period with $150.9 billion in industry assets, up from $144.1 billion at the end of Q1, with industry assets remaining near multi-year highs.¹⁸ Total Variable Rate Demand Notes (VRDN) outstanding ended the second quarter around $106 billion as tax-exempt money fund industry assets continued to surpass VRDN supply.¹⁹

Ending 2Q 2026, year to date VRDN new issuance stood at $7.8bn, following 2025 total year issuance of $20.8 billion which was up 27% from 2024 issuance of $16.3 billion.²⁰ In the secondary market, VRDN inventory held on dealer balance sheets averaged approximately $4.7 billion for the quarter, slightly below the rolling 1 year average of $4.9 billion, as inventory levels rebounded from Q1 after seasonal redemption activity around April tax payments reduced demand for VRDN securities.²¹

The Securities Industry and Financial Markets Association (SIFMA) Index, which represents the average yield on 7- day municipal floating rate debt, began the quarter at 2.42% and ranged between 1.57% and 3.65%, before ending the period at 2.67%.²²

During this time, the SIFMA Index averaged 2.58%, above its average of 2.01% for the first quarter.²³ Looking ahead, heavy reinvestment cash in July will bring excess demand for VRDN securities, allowing dealers to initially reset VRDN yields lower. Low yields may push investors out of the space temporarily, which will then prompt dealers to reset VRDN yields higher throughout July.

MuniCash remained in the 5- to 7-day WAM range during the quarter with high levels of daily and weekly liquidity, as the Fund intends to invest solely in securities that are considered weekly liquid assets as defined in Rule 2a-7 under the Investment Company Act of 1940, as amended.​

​Though MuniCash intends to invest only in weekly liquid assets, for broader market color, yields varied throughout the quarter, impacted by persistent front-end rate volatility, sticky inflation, and shifting expectations around timing and direction of Federal Reserve rate action. 1-year municipal bond yields ranged from 2.27% to 2.61%, before ending the quarter at 2.31%.²⁴ In addition, credit fundamentals have moved off peak strength, but many states continue to benefit from revenue growth, low debt service burdens, normalized expenditure trends, and strong reserves.

Consistent with the themes across the industry, the iShares® Ultra Short Duration Bond Active ETF (ICSH) experienced net inflows of $616 million this quarter, ending the quarter at $7.7 billion in AUM.

CP outstandings decreased by $8.5 billion to $407.2 billion during the quarter. Additionally, since the end of the first quarter, Tier 2 CP outstandings decreased by $19.7 billion to $99.5 billion in June, a seasonal pattern we typically see. Asset-Backed Commercial Paper (ABCP) outstandings increased by $48.2 billion to $485 billion.²⁵

Yields in the Investment Grade (IG) space were volatile throughout the quarter, with the yields on the JULI All Ex EM 1- to 3-year Index ranging between 4.33% and 4.75%, ending the quarter at 4.68% amid heightened geopolitical and macroeconomic uncertainty.²⁶

IG spreads tightened throughout the quarter as strong, consistent demand continued to absorb elevated new issuance. IG yields generally tracked movements in interest rates over the quarter and finished June higher, driven by rising U.S. Treasury yields, which rose in response to evolving market expectations for Federal Reserve policy.

First quarter IG issuance remained strong, with more than $532 billion coming to market. Issuance in June alone exceeded $188 billion, becoming the largest June issuance month on record. Overall, we believe investors continue to assess the Federal Reserve’s monetary policy path and the outlook for economic growth.

Throughout the quarter, our focus was keeping the fund well positioned by focusing purchases on fixed CP and CDs maturing between 1-week and 12-months at yields ranging from 3.81% to 4.42%. Other investments consisted of fixed and floating CDs at yields ranging from 4.05% to 4.14%, fixed and floating corporate bonds with maturities of 1- to 2-years+ at yields ranging from 3.89% to 4.75%, and ABS with a weighted average life (WAL) of 1-year at yields ranging from 4.10% to 4.15%.²⁷

At the quarter-end, markets were pricing in around 1.5 rate hikes over the balance of 2026, but expectations continue to remain contingent on inflation data following the geopolitical and macroeconomic uncertainty. In IG, with growing uncertainties in the United States and abroad, we remain selective when adding credit risk.