Money Market Funds Commentary
How did you position your portfolios during the quarter?
On July 31, the Federal Reserve Open Market Committee (FOMC) lowered the federal funds target range 25 basis points (0.25%) to 2.00% - 2.25%. The FOMC noted muted inflation pressures as well as soft growth of business fixed investment. And on September 18, it further lowered the target range to 1.75% - 2.00%, while lowering the Interest on Excess Reserve rate (IOER) to 1.80%. The impact of the decreases were somewhat buffered by longer-term securities in both funds, but money fund yields are declining, reflecting the rate environment.
The month of September saw a noteworthy dislocation in the overnight repurchase agreement (repo) market. Rates spiked sharply, with the rates we received briefly rising over 200 basis points (2.00%). In response, the Federal Reserve Board (the Fed) injected liquidity into the financial system via short-term open market operations, and continued these operations into October. This calmed markets, but questions remain about how much additional liquidity may be necessary.
In the Government Securities Money Market Fund, Secured Overnight Funding Rate (SOFR)-based floating-rate notes1 continued to add value, typically yielding a bit more than the overnight repo without affecting the Weighted Average Life (WAL)1 of the Fund adversely. Moreover, in both funds, Fixed Income Clearing Corp.1 (FICC)-sponsored repo continued to perform well.**
As a hedge against lower rates, we took limited positions in somewhat longer-term Treasuries during the quarter, as we had done earlier in the year, but as the markets began to anticipate lower rates, longer-term opportunities became scarce. In the Government Securities Money Market Fund, the SOFR floating-rate notes helped buffer lower rates as they typically yielded a bit more than overnight repo. As we believed that Treasury supply might increase in the latter part of the year due to increased issuance by the Treasury, we felt that this increase might be reflected in higher repo levels from time to time, and this in fact happened.**
What is your outlook, and how are you positioning the funds?
With continued signs of economic weakening, globally and within the United States, and with the Fed reversing course halfway through 2019 to a more accommodative stance, we believe the funds remain positioned for the possibility of still lower rates.**
We continue to closely monitor the market’s perception of future FOMC moves, and we look for opportunities to help lock in longer-term rates as we feel the short-term momentum is toward lower levels. We are also open to adding additional floating-rate notes if we feel the levels are attractive.**
Lipper
The Lipper Mutual Funds Average is an equally weighted average of the mutual funds within their respective Lipper classification, adjusted for reinvestment of capital gains distributions and income dividends. Lipper does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright 2019, All Rights Reserved.
Definitions
The London Interbank Offered Rate (LIBOR) is the average rate charged by large banks in London for loans to each other. LIBOR is a relatively volatile rate and is typically quoted in maturities of one month, three months, six months and one year. Secured Overnight Financing Rate (SOFR) was originally known as the broad Treasuries financing rate, the secured overnight financing rate is a measure of the cost of borrowing cash on an overnight basis in the U.S. Treasury repo markets. It is the U.S. successor to Libor. Fixed Income Clearing Corporation (FICC) is an agency that deals with the confirmation, settlement, and delivery of fixed-income assets in the U.S. The agency ensures the systematic and efficient settlement of U.S. government securities and mortgage-backed security (MBS) transactions in the market. The Weighted Average Life (WAL) is the average length of time that each dollar of unpaid principal on a loan, a mortgage or an amortizing bond remains outstanding.
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