Allspring MMFs' PM Commentary
Allspring Money Market Funds writes in their latest "Portfolio Manager Commentary, "The government money markets have settled into a civilized, orderly state based on a few key pillars: first, an expectation that short-term rates governed by the Federal Reserve (Fed) will be at the current level, or maybe a touch higher, for a good amount of time stretching well into next year; second, a steady, plentiful stream of Treasury bill (T-bill) supply that may span nearly a year, from late May this year through the first quarter of 2024; and third, a still-generous quantity of excess demand in the system, best represented by the roughly $1.5 trillion in the Fed's reverse repurchase program (RRP). This contrasts starkly with the prior year, when the Fed was in motion, with both the pace and final destination of rate changes unknown; T-bill supply gyrated wildly, largely due to debt ceiling constraints; and investors reacted to the uncertainty by parking cash in the RRP, which reached an all-time high above $2.5 trillion at the end of 2022. Over the summer, as investors became more comfortable with a careful Fed nearing the end of its hiking cycle, they steadily bought the new T-bill supply as it came, earning yields not far from the overnight RRP rate. This brought the RRP balance down by nearly $1 trillion in the nine months since the all-time high. Given the expected durability of the pillars currently driving market behavior, it will not be a surprise to see RRP cash continue to be deployed in the T-bill market in the same orderly fashion through the end of the year. If expectations of Fed activity become unanchored again, or when T-bill supply fades in the spring tax season, the money markets may shed their calm veneer and resume their messy search for the proper levels." The update comments on the "Prime sector <b:>," "In this environment of higher rates for a longer time, the front end of the rates curve continues to be an attractive asset class, offering lofty yields as well as reduced duration risk.... [P]rime money market yields have remained elevated as the markets focus on the 'higher for longer' messaging: The London Interbank Offered Rate (LIBOR) 1 yield curve was little changed from August month-end: while the 3-month printed at 5.66%, the 1-month yield sagged 1 bp to 5.43%, and the 6-month yield reset 2 bps higher at 5.90%. An interesting development this month was a very large commercial paper issuance or financing campaign by a large highly rated tech corporation. Most issuance in the 2a-7 prime space tends to be financials-sector-related, whether in the form of deposits or commercial paper issued directly by banks and finance companies or in the form of securities issued by funding programs sponsored by those entities, such as asset-backed commercial paper. This corporate program was brought to market with an authorized total program size of $46 billion; by month-end, outstandings had reached $26 billion. This was big news from a corporate issuer and a relative novelty in our space. Even with this size, however, and being primary issuance (i.e., not being written to roll a maturity), the pricing was somewhat on the rich side at just at or slightly above the term Secured Overnight Financing Rate (SOFR)."
