BlackRock Liquidity Funds

Investment Commentary

October 31, 2009

The Federal Open Market Committee (FOMC) did not hold a regularly scheduled meeting during October, but the release of the minutes from the September meeting offered insights into the Committee's deliberations. Meeting participants acknowledged the overall improvement in economic activity, and most thought a recovery was under way. However, many committee members noted that the economic recovery would likely be constrained and the costs of weaker-than-expected growth could be relatively high, thus warranting an unchanged federal funds target range of 0% to 0.25%. In October, both the Bank of England and the European Central Bank kept their key interest rates unchanged at 0.50% and 1.00%, respectively.

There continues to be a substantial decline in the use of certain Federal Reserve programs established to support the money markets. In mid-October, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) fell to a zero balance and remains at that level to date. The amount owned by the Commercial Paper Funding Facility (CPFF) fell to just under $15 billion in October, off 95% from its January peak. On October 30, the Money Market Investor Funding Facility expired as scheduled without being utilized throughout its tenure. The AMLF and CPFF are scheduled to sunset on February 1, 2010.

LIBOR settings across the curve fell as much as six basis points during October, with most of the decline occurring in longer-dated settings. As a result, the slope of the LIBOR curve, as measured from one month to one year, fell to 96 basis points from 102 basis points at the end of September.

Treasury bill yields fell as much as four basis points in October as investor demand for 2010 maturities increased in preparation for year-end. In addition, expectations for a $185 billion reduction of the Special Financing Program placed further downward pressure on yields. Excess reserves, which surpassed $1 trillion, contributed to a decline in October's average effective federal funds level to 0.12% from 0.15% in September. Financing levels on repurchase agreements averaged 0.07% for Treasury collateral and 0.09% for agency mortgage collateral, down six basis points from September's averages.

October was extremely quiet in the short-term municipal money market sector. Note season concluded in September, and investors shifted their focus to managing short-term cash flows. Yields on municipal obligations moved very little during the month as investors waited to see what direction, if any, the FOMC was going to take with interest rates. As it became evident that the FOMC was going to keep rates unchanged, dealers took the opportunity to maintain yields and indexes in a very tight range. The 7-day weekly Securities Industry and Financial Markets Association Index averaged 0.26% after hitting an all-time low of 0.24%, and fluctuated in a range of two basis points throughout the month. Similarly, the one-year Bond Buyer Note Index averaged just 0.56%, and also traded in a tight range of only five basis points. We continue to foresee low absolute yield levels as long as the FOMC remains in a zero interest rate policy.

Contributors: Jacy Czajkowski, John Ng, William Henderson

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Prepared by BlackRock Investments, LLC, member FINRA.