Timely action

Market outlook

We believe the Federal Reserve’s (Fed’s) key policy rate could move modestly higher in the near- to intermediate-term if inflation remains elevated and low unemployment persists.

An increase in net T-bill supply should be generally well absorbed during the fourth quarter, in our view, and we anticipate that funding pressures for Treasury collateral will remain largely contained amid ample levels of bank reserves and elevated levels of money market fund industry assets.

We will also be looking for updates about the various Fed task forces announced by Chair Kevin Warsh in June, covering communications, balance sheet policy, data, productivity and jobs, and inflation frameworks.

Q3 highlights

After keeping its policy rate unchanged at its meeting in July, the Federal Open Market Committee (FOMC or the Committee) raised the federal funds target rate by 0.25% to a new range of 3.75% to 4.00% at its September 16 meeting. The decision was unanimous.

The statement released in conjunction with the September meeting reiterated that “economic activity is expanding at a solid pace,” adding that “domestic spending has been resilient” amid elevated uncertainty from geopolitical developments.¹ Inflation continued to be described as “elevated,” while strength in productivity growth was highlighted and the unemployment rate was again described as “little changed.”

The September meeting statement also declared that the increase in the target range “will support a timelier return to the Committee’s” 2.00% target and reiterated that the Committee is “continuing its policy of maintaining ample reserves in the banking system.”²

The median federal funds rate forecast contained in the quarterly Summary of Economic Projections (SEP) for 2026, released in conjunction with the September 16 FOMC meeting, rose to 4.1% from the 3.8% projection released in June 2026.³ All but two of the 18 FOMC participants who submitted an interest rate projection for 2026 forecasted at least one additional 0.25% increase in the range for the federal funds target rate.

The updated SEP for 2026 reflected a slightly higher core inflation forecast and a slightly lower unemployment rate projection, relative to June 2026.⁴

Net T‑bill supply contracted in September but increased during the third quarter by $427.74 billion,⁵ while overnight reverse repurchase agreement (RRP) utilization remained modest, ranging from $0.03 billion to $11.54 billion.⁶

U.S. money market fund (MMF) assets decreased by $46.62 billion during the quarter. Government MMF assets fell by $46.18 billion and prime MMF assets declined by $5.54 billion, while tax-exempt MMFs increased by $5.10 billion.⁷

BlackRock government MMFs experienced both inflows and outflows during the quarter, with mid-September outflows followed by inflows later in the month. Industry assets remained near record levels despite corporate tax-related outflows in September.

The Federal Open Market Committee (FOMC) kept its policy rate unchanged in July before raising it in September to support a timelier return of inflation to target. The September statement noted elevated inflation and resilient domestic spending. Front-end Treasury bill yields rose during the quarter. The 4-month Treasury bill ended the period 33 basis points (bps) higher at 4.17%.⁸ The 6-month Treasury bill ended the period 46 bps higher at 4.38%.⁹ The 12-month tenor increased 58 bps, finishing the period at 4.60%.¹⁰

Government fund positioning remained cautious amid uncertainty around Fed policy and Middle East developments. At the start of the quarter, weighted average maturities (WAMs) were near 44 days for repurchase agreement (repo) eligible funds and 47 days for non-repo funds.¹¹ By the end of the quarter, these figures were 46 and 54 days, respectively, with the team positioning portfolios for the evolving 2026 and 2027 rate path.

Purchases across non-repo eligible government MMFs focused on Treasury bills (T-bills), with Treasury coupon securities and floating-rate notes also purchased during the quarter. Activity was concentrated in 2- to 6-month T-bills at average yields of 3.76% to 3.96%, with select purchases of longer-dated securities extending out to 13 months.¹²

Net Treasury bill supply increased by approximately $428 billion in the third quarter, rising in July and August before temporarily contracting in September around the corporate tax date.

The Secured Overnight Financing Rate (SOFR) remained largely rangebound through the summer, with periodic month-end pressure. Following the September rate increase, SOFR traded just below the midpoint of the new target range. Funding pressures remained largely contained amid elevated money market fund assets, despite a temporary contraction in net bill supply around the September corporate tax date.¹³

The September policy projections indicated higher policy rates before year-end. Net T-bill supply was expected to increase in October and November. We are focused on maintaining a cautious duration profile as the path of monetary policy evolves.

BlackRock prime MMFs experienced net inflows for the third quarter, despite a modest decline in prime MMF assets across the industry.

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 $8.1 billion to $399.1 billion by the end of the quarter.¹⁵ 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 3.66% to 4.54%. Floating-rate investments with maturities of 1 month to 1 year were added at spreads of 0.08% to 0.50% over SOFR.¹⁶

Other purchases during the period were primarily in certificates of deposit, time deposits, and overnight repo for eligible portfolios.¹⁷

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 September, our target WAM range was 40 to 50 days, and the funds had an average weekly liquidity of approximately 50%.¹⁸

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 heightened geopolitical caution is warranted, 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 third quarter of 2026, ending the period with $156.0 billion in industry assets, up from $150.9 billion at the end of Q2, reaching a 10-year high.¹⁹ Total Variable Rate Demand Notes (VRDN) outstanding ended the third quarter around $107 billion as tax-exempt money fund industry assets continued to surpass VRDN supply.²⁰

Ending Q3 2026, year-to-date VRDN new issuance stood at $10.8 billion, following 2025 total year issuance of $20.8 billion which was up 28% from 2024 issuance of $16.3 billion.²¹ In the secondary market, VRDN inventory held on dealer balance sheets averaged approximately $5.7 billion for the quarter, above the rolling 1-year average of $4.8 billion, driven by elevated municipal supply and softer demand for short-term tax-exempt securities as summer reinvestment activity tapered off.²²

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 2.67% and ranged between 1.64% and 3.93%, before ending the period at 3.93%.²³

During this time, the SIFMA Index averaged 2.50%, below its average of 2.58% for the second quarter.²⁴ Looking ahead, October and November typically benefit from stable demand and reinvestment flows; however, elevated tax-loss selling across the municipal market may create additional volatility in VRDN demand and SIFMA rates.

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, municipal 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 3.63%, before ending the quarter at 3.48%.²⁵ 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 BlackRock iShares Ultra Short Duration Bond Active ETF (ICSH) experienced net inflows of $1.1 billion this quarter, ending the third quarter at $8.8 billion in assets under management (AUM).

Tier 1 Commercial Paper (CP) outstandings decreased by $8.1 billion to $399.1 billion during the quarter. Tier 2 CP outstandings increased by $7.2 billion to $107.4 billion in September. Asset-Backed Commercial Paper (ABCP) outstandings increased by $5.1 billion to $502.4 billion.²⁶

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 4.63% and 5.56%, ending the quarter higher at 5.55% amid heightened geopolitical and macroeconomic uncertainty.²⁷

IG spreads widened by the end of the quarter but remained near the tight end of the 1-year range. IG yields generally tracked movements in interest rates over the quarter and finished September higher, driven by higher U.S. Treasury yields, which rose in response to evolving market expectations for Federal Reserve policy.

Third-quarter IG issuance remained strong, with more than $500 billion coming to market. Issuance in September alone exceeded $200 billion. Overall, investors continue to assess the Fed’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 and floating CP maturing between 1 week and 12 months at yields ranging from 3.80% to 4.54%. Other investments consisted of fixed and floating CDs at yields ranging from 4.01% to 4.50%, floating corporate bonds at average yields around 4.38%, and 2- to 3-year fixed-rate corporate bonds at yields ranging from 4.55% to 5.12%.²⁸

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