Holding steady in unsteady times

Market outlook

• We expect the Federal Open Market Committee (FOMC, Fed, or the Committee) to keep its key policy rate unchanged amid elevated uncertainty from events in the Middle East. The effects of the conflict on inflation and employment will determine the future direction of interest rates in our view.
• We expect net Treasury Bill (T-bill) supply to contract during the second quarter as federal income tax receipts in part offset borrowing needs of the US Treasury. Reduced net T-bill supply along with purchases of T-bills by the Federal Reserve Bank of New York (New York Fed) to maintain an “ample” level of bank reserves should in our view remain supportive of funding conditions.
• Fed Chair Jerome Powell—whose term ends May 15, 2026—indicated he will serve as chair pro tempore until his successor is confirmed by the Senate.

Q1 highlights

• Following a 0.75% overall reduction in the range for the federal funds target rate in the latter part of 2025, the FOMC elected to keep its key policy rate unchanged at 3.50% to 3.75% during the first quarter of 2026. Each of the two FOMC meetings during the period saw at least one dissent in favour of 0.25% cut.
• The statement¹ released in conjunction with the March 18, 2026, FOMC meeting acknowledged uncertainty about how developments in the Middle East will affect the U.S. economy and noted that the unemployment rate has had “little change in recent months.” Inflation continued to be characterized as “somewhat elevated.”
• Reflecting, in our view, a desire to move cautiously until the effects of the war in Iran are better understood, the FOMC maintained its outlook for policy, noting that in considering “the extent and timing of additional adjustments to the target range for the federal funds rate,” it would continue to “carefully assess incoming data, the evolving outlook, and the balance of risks.”²
• The median federal funds rate forecast contained in the quarterly Summary of Economic Projections (SEP) for 2026,³ released in conjunction with the March FOMC meeting, was unchanged from the 3.4% projection released in December 2025, implying in our estimation one additional cut of 0.25% in 2026.
• The updated SEP for 2026 reflected a slightly higher economic growth projection, an unchanged unemployment rate projection, and modestly higher headline and core inflation forecasts relative to December 2025.
• Net T‑bill supply increased during the first quarter of 2026, rising by $172.25 billion after expanding in each of January, February, and March.⁴ The increase in supply contributed, in our view, to ongoing low overnight reverse repurchase agreement (RRP) utilization, which averaged just $2.41 billion over the course of the quarter.⁵
• Assets across the U.S. money market fund (MMF) industry increased $77.55 billion year to date. Assets of prime and government MMFs rose by $27.61 billion and $54.08 billion, respectively, while tax‑exempt MMFs experienced a modest decline of $4.14 billion.⁶

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

Following the Federal Open Market Committee’s (FOMC) rate cuts in September, October, and December of last year, expectations had been for short-term Treasury rates to move lower. However, amid heightened geopolitical risks and ongoing macroeconomic uncertainty, front-end rates remained elevated quarter-over-quarter. The 4-month Treasury bill ended the period 7 basis points (bps) higher at 3.70%.⁷ The 6-month Treasury bill ended the period 11 bps higher at 3.72%.⁸ The 12- month tenor increased 19 bps, finishing the period at 3.67%.⁹

At the start of the quarter, the weighted average maturities (WAMs) in our government funds were near 43 days for repurchase agreement (repo) eligible funds and 41 days for non-repo funds.¹⁰ By the end of the quarter, these figures were 49 and 38 days, respectively, with the team positioning portfolios for the evolving 2026 rate path.

Purchases throughout the quarter were mostly comprised of 2 to 12-month Treasury Bills (T-bills) at average yields of 3.58% to 3.69%.¹¹

Treasury issuance in the first quarter trended higher. Supply was skewed towards coupons, with around $364 billion coming to market by the end of March. T-Bill issuance surpassed $272 billion.

The Secured Overnight Financing Rate (SOFR) remained elevated and largely range-bound, reflecting the FOMC’s pause in cuts following its late 2025 cuts. While the SOFR drifted modestly lower late in the quarter, it averaged in the mid‑3.6% range throughout Q1, underscoring a higher‑for‑longer funding environment amid ongoing macroeconomic and geopolitical uncertainty. SOFR ended the quarter at 3.68%.¹²

Amid elevated uncertainty from events in the Middle East, we expect the FOMC to keep its key policy rate unchanged in the near term. In our view, the effects of the conflict on inflation and employment will determine the future direction of interest rates. The net supply of T-Bills should contract during the second quarter as federal income tax receipts in part offset borrowing needs of the US Treasury. Reduced supply along with purchases of T-Bills by the Federal Reserve to maintain an “ample” level of bank reserves will in our view remain supportive of funding conditions. We are focused on maintaining the longer duration profile of our funds.

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 0.18%, in line with historical averages.¹³

Tier 1 Commercial Paper (CP) outstandings increased by $18.5 billion to $415.7 billion during 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 3.60% to 4.23%. Floating rate investments with maturities of 4 months to 1 year were added at spreads of 0.10% to 0.50% over SOFR.¹⁴

Other purchases during the period were primarily in certificates of deposits, time deposits, and overnight repo for eligible portfolios.¹⁵

Toward the end of the quarter, we added select fixed-rate investments while the yield curve was steep to take advantage of the higher yields available at longer maturities. We also continued to add floating-rate securities to enhance overall income. We maintained our positioning through select trades that still offer additional income for the portfolios. At the end of March, our target WAM range was 41 to 46 days, and the funds had an average weekly liquidity of approximately 54%.¹⁶

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. Our funds will aim to maintain current durations.

Tax-exempt money funds saw outflows for the first quarter of 2026, ending the period with $144.1 billion in industry assets, down from $150.2 billion at the start of the year, though industry assets remain near multi-year highs.¹⁶Total Variable Rate Demand Notes (VRDN) outstanding ended the first quarter around $103 billion as tax-exempt money fund industry assets continued to surpass VRDN supply.¹⁷

Ending 1Q 2026, year to date VRDN new issuance stood at $3.7bn, following 2025 total year issuance of $20.8 billion which was up 27% from 2024 issuance of $16.3 billion.¹⁸ In the secondary market, VRDN inventory held on dealer balance sheets averaged approximately $3.1 billion for the quarter, below the rolling 1 year average of $4.9 billion, due to heavy January reinvestment cash which increased demand and suppressed available inventory.¹⁹

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 2.36% and ranged between 1.28% and 2.52%, before ending the period at 2.42%.²⁰

During this time, the SIFMA Index averaged 2.01%, below its average of 2.74% for the fourth quarter.²¹ Looking ahead, heavy seasonal redemptions due to tax time in April are expected to reduce demand for VRDN securities, allowing dealers to reset VRDN yields to much higher attractive levels throughout April.

MuniCash remained positioned 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 (the 1940 Act).

Though MuniCash intends to invest only in weekly liquid assets, for broader market color in the fixed rate space, yields varied greatly throughout the quarter, impacted by the war in Iran and its consequential greater market volatility. 1-year municipal bond yields initially decreased from 2.46% to 2.02% by early March before rising to end the quarter at 2.39%.²² In addition, credit fundamentals are moving off peak strength but remain generally sound.​

In contrast with the theme across the ultra-short bond industry, the BlackRock Short Obligations Fund experienced net outflows in the first quarter.²³

Tier 1 commercial paper (CP) outstandings increased by $18.5 billion to $415.7 billion during the quarter. Additionally, since the end of the fourth quarter, Tier 2 CP outstandings decreased by $1.8 billion to $119.2 billion in March. Asset-backed commercial paper (ABCP) outstandings increased by $8.5 billion to $436.8 billion.²⁴

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 4.01% and 4.68%, ending the quarter-over-quarter period higher at 4.51% amid heightened geopolitical and macroeconomic uncertainty.²⁵

IG spreads tightened early in the quarter as strong demand continued to absorb elevated new issuance. As the quarter progressed into February, spreads softened amid heightened volatility in the software sector and increased economic uncertainty. By March, spreads widened modestly, reflecting heavy supply conditions and more cautious investor sentiment. IG yields generally tracked movements in interest rates over the quarter and finished March higher, driven by rising U.S. Treasury yields and spread widening.

First quarter IG issuance remained strong, with more than $625 billion coming to market. Issuance in March alone exceeded $240 billion, with AI-related capital expenditures and refinancing activity contributing to record daily and weekly volumes. Overall, 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 and floating CP maturing between 1-week and 12-months at yields ranging from 3.73% to 3.98%. Other investments consisted of fixed and floating corporate bonds with maturities of 1 to 2-years+ with yields ranging from 3.90% to 4.47%, and asset-backed securities (ABS) with a weighted average life (WAL) of 1-year at average yields ranging from 3.80% to 3.86%.²⁶

At the quarter-end, markets were pricing in around 1 cut 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.