Muni money market funds in the new year

In early December 2025, Crane Data noted that money market mutual fund assets broke the $8 trillion barrier for the first time with year-to-date growth of over 12%, an impressive accomplishment. While municipal money market funds represent a relatively small portion of the industry total, they have contributed to the strong growth seen in the past four years. Based on data from iMoneyNet, municipal money funds have grown by over 70% since the end of 2021, with annual double-digit growth from 2022-2025.

Turns out that earning a competitive rate with little risk is compelling. And while rates are off the highs experienced in 2023, a projected terminal fed funds rate of around 3% is a positive sign for continued money fund growth.

Because munis are tax-free, they typically offer a lower absolute yield. Investors should first determine their marginal tax rate in order to calculate their taxable equivalent yield, the rate that a taxable investment would need to offer in order to be comparable to the yield of the tax-free investment. Investors in the 32% (and higher) marginal tax bracket generally benefit from owning municipal investments.

What’s in a muni money fund?

Municipal money funds generally have two primary investments: Variable Rate Demand Notes (VRDNs) and state and local government notes. VRDNs have a very short (typically either one-day or seven-day) par put and rate reset feature that makes them, in our opinion, the premier liquidity instrument in the municipal market. The supply of VRDNs has been steady in recent years. Given the asset growth noted above, the market could benefit from a pickup in supply. With the current steepness of the municipal yield curve, the conditions are ripe for this to occur, and we have anecdotal evidence to support this. The supply of state and local government notes was dramatically reduced by the generous support from the federal government during the pandemic. With that well in the rearview mirror (along with what was a backlog of capital expenditures), we have experienced a reasonable annual increase of roughly 10% over the last three years.

The outlook for 2026

Municipal credit is generally strong, though some municipal governments are in a better position than others. Financial performance benefited from the federal aid noted earlier and an economy that did better than feared. This allowed state and local governments to grow financial reserves to strong levels, helping to protect them against a downturn. Budgeting is an important factor in this performance. Most municipal governments have outperformed recent annual budgets via stronger revenues or lighter expenditures (or both). With that said, longer-term budgets often show large gaps that garner negative headlines. It is important to note that these are often inflated with wishful spending and conservative revenue assumptions. However, we would not be alarmed or surprised to see a gradual reduction in currently strong financial reserves to levels closer to historical averages.