To be continued

Market outlook

• We believe the Federal Open Market Committee (FOMC) could move to adjust the federal funds target range modestly lower over time should data point to a meaningful softening in labor market conditions if any upward pressure on prices from changes in trade policy are viewed to be temporary.
• We acknowledge a greater level of uncertainty around our outlook given rapidly evolving policy actions from the new administration, with the chance that rates are left unchanged for an extended period until additional clarity is gained.
• Net Treasury Bill (T-bill) supply is likely to continue to contract until the debt limit is resolved.

Q1 highlights

• The FOMC left the federal funds target rate unchanged, maintaining the current target range of 4.25% to 4.50%. The vote was unanimous.
• The statement¹ released in conjunction with the meeting was updated to acknowledge that “uncertainty around the economic outlook has increased.” It also reiterated that “the extent and timing” of additional changes in the federal funds target range would be based on an assessment of “incoming data, the evolving outlook, and the balance of risks.”
• The FOMC announced that beginning in April it will reduce the amount of Treasury holdings on its balance sheet that are allowed to mature without being reinvested.
• The median federal funds rate forecast contained in the Summary of Economic Projections (SEP) for 2025, released in conjunction with the FOMC meeting, was unchanged from the 3.9% projection released in December 2024, implying in our estimation a total of two cuts of 0.25% in 2025².
• Net T-bill supply turned negative beginning in the latter half of February after the US Treasury declared a debt issuance suspension period on January 17, 2025 (and again on March 14, 2025), with net supply falling $30.6 billion during the quarter³.
• Utilization of the overnight reverse repurchase (RRP) registered $399.2 billion at the end of the first quarter, down from $473.5 at the end of the prior quarter but above a low of $58.8 billion on February 14, 2025⁴.
• Assets across the US money market fund (MMF) industry increased $163.6 billion during the first quarter. Assets of government and prime MMFs rose by $105.4 billion and $58.5 billion, respectively, while tax-exempt MMFs fell by $0.287billion⁵.

In contrast to the increase in government money market fund (MMF) assets across the industry, BlackRock government MMF’s experienced net outflows during the first quarter.

Short-term Treasury rates fluctuated throughout the quarter, as markets sought clarity on the future path of monetary and fiscal policy. The 4-month Treasury bill saw the only increase, ending the period up 1 basis point at 4.32%⁶. Conversely, the 12-month tenor decreased 13 basis points, finishing the period at 4.04%⁷.

At the start of the quarter, weighted average maturities (WAMs) in our government funds were near 47 days for repurchase agreement (repo)-eligible funds and 52 days for non-repo funds. By the end of the quarter, these figures decreased to 34 and 46 days, respectively, with the team waiting to get further clarity on the path of monetary policy before adding more duration.

Purchases throughout the quarter were mostly comprised of 2-to-6-month T-bills at average yields of 4.30% to 4.34%⁸.

Year to date, markets received $335 billion of T-bill and coupon supply, with a heavy skew towards coupons⁹. Additional projected issuance is also expected to be skewed towards coupons, as limitations were placed on bill issuance with the debt ceiling reinstatement that occurred on January 2, 2025¹⁰.

While eligible funds utilized the Fed RRP throughout the period, aggregate usage of the facility started to pick up during the middle of the quarter and particularly during quarter end. However, we continue to see investors who favored the Fed RRP as an alternative to short-dated government securities rotate into dealer repo as rates remained more attractive following the Fed’s 5 basis point reduction to the RRP rate and net T-bill supply has turned negative, in our opinion.

We expect this to continue as we anticipate limited bill supply as the Treasury navigates the debt ceiling. We have added fixed rate exposure to hedge against further downside risks as well as continue to build laddered exposures to floating rate exposure the last two weeks and remain patient with respect to adding more duration as recent economic data shows labor to be resilient and inflation remaining sticky, creating uncertainty regarding the future path of monetary policy.

Consistent with the increase in assets of prime MMFs across the industry, BlackRock prime MMF’s experienced net inflows during the first quarter.

We believe investors exhibited demand for prime funds to take advantage of the incremental yield and diversification. At quarter-end, the spread between institutional government and prime MMF yields was 0.22%¹¹.

Tier 1 Commercial Paper (CP) outstandings increased by $27.1 billion over the quarter to $402.3 billion. As expected, CP rates continued to reprice in line with expectations for the future path of monetary policy. Financial CP within our prime funds maturing in three months or less ended the quarter with an average yield of 4.50%.

Rates on money market deposit instruments, including time deposits and certificates of deposits, decreased throughout the quarter in line with rate cut expectations for the Federal Reserve. Unsecured overnight rates averaged 4.33% during the quarter, below last quarter’s average of 4.66%¹².

Purchases during the period were primarily of certificate of deposits and time deposits, CP and overnight repo for eligible portfolios.

Although we favored a shorter-duration stance over the last several months that seeks to protect against interest rate volatility, we have recently focused more on adding exposures to highly rated longer tenor positions to add duration where appropriate to lock in attractive fixed-rate yields. At quarter end, our target WAM range was 35 to 40 days, and the funds had an average weekly liquidity of approximately 53%¹³.

We will continue to selectively add floating rate exposure as we believe these instruments offer value in an environment where the Fed delivers less cuts than the markets anticipate. Additionally, we believe there is a need for heightened geopolitical caution, and we remain selective when adding credit risk. Our funds will aim to maintain a slightly neutral to long duration bias.

Flows for tax-exempt money funds remained relatively flat for the first quarter, ending the period at $135.4 billion from $135.7 billion in industry assets to start the year¹⁴. Dealer variable rate demand note (VRDN) inventory ended the period at $2.5 billion, below the rolling 12-month average of $3.5 billion¹⁵.

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 3.62% and dipped as low as 1.83% early in the quarter amongst strong seasonal January reinvestment cash demand¹⁶.The SIFMA Index again reset as high as 3.62% in mid-March as VRDN demand weakened amongst elevated long-term municipal bond new issue supply, which is up 22% year over year¹⁷.Finally, the SIFMA Index ended the period at 2.87%, a 67% ratio versus taxable cash alternatives. Total VRDNs outstanding ended the first quarter around $100.2 billion as tax-exempt money fund industry assets continued to surpass VRDN supply¹⁸.

MuniCashremained positioned in the 5-to 6-day WAM range during the first 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 (the “1940 Act”).

Though MuniCashintends to invest only in weekly liquidity assets, for broader market color in the fixed-rate space, 1-year municipal bond yields and 1-year municipal note yields decreased from 2.86% and 3.07% to 2.61% and 2.88% respectively¹⁹.

While 2024 municipal note issuance remained below pre-pandemic levels, issuance increased by 17.3% to $32.0 billion last year and we expect it to continue to gradually move higher in 2025²⁰. In the near-term, we anticipate dealers will reset VRDN yields higher in April amidst decreased demand for VRDN securities due to seasonal tax-related redemptions, rewarding investors holding VRDNs at this time²¹.

Consistent with the theme across the ultra-short bond industry, the BlackRock Short Obligations Fund experienced net outflows throughout the first quarter.

Tier 1 Commercial Paper (“CP) outstandings increased by $27.1 billion to $402.3 billion during the quarter. Additionally, Tier 2 CP outstandings increased by $11.8 billion to $106.8 billion at the end of March²². Asset-Backed Commercial Paper (“ABCP”) outstandings increased by $9.7 billion to $377.4 billion²³.

Yields in the Investment Grade (IG) space were slightly volatile throughout the quarter, with the yields on the JULI All Ex EM 1-to 3-year Index ranging between 4.56% and 5.02%, as markets shifted their view on Fed policy²⁴.

Investment Grade (“IG”) spreads were tight at the beginning of the quarter as demand outpaced supply. By the end of the quarter, spreads slightly widened amid heavy March supply and policy uncertainty. IG yields during the quarter were largely in line with rates.

First quarter IG issuance reached nearly $537 billion, with March being the most active month for IG trading ever²⁵.
Overall, investors continue to assess the Federal Reserve’s path of monetary policy and the outlook for economic growth.

Throughout the quarter, our focus was keeping the fund well positioned by focusing purchases on fixed and floating CP maturing between 1-week and 12-months at yields ranging from 4.53% to 4.67%. Other investments consisted of fixed and floating corporate bonds with maturities to 1 to 2-years and beyond with yields ranging from 4.63% to 5.19%, and 6-month to 2-year fixed and floating CDs with yields ranging from 4.50% to 4.71%²⁶.

Following the quarter-end, markets are pricing in slightly over 3 cuts for the rest of 2025, but expectations continue to remain contingent on inflation and employment data as well as the trajectory or economic growth. In IG, with growing uncertainties in the United States and abroad, we remain selective when adding credit risk.