Recently, some money fund managers and market strategists have held out hope for fund investors that slightly higher rates may be imminent. While nobody is predicting a hike in the benchmark Federal funds target rate in 2009, expectations of higher rates in 2010, the unwinding of Fed support programs, and the Fed's preparations for reverse repos with money funds all should bring some welcome breathing room for money funds subsisting on rock-bottom gross yields.
Last Thursday, Federated Investors hosted a Quarterly Money Market Update entitled "The Fed's Low-Rate Stance: Prospects for Relief." CIO Debbie Cunningham said, "The possible reverse repo by the Fed with select players, including money markets, would begin to reverse that process [pushing repo rates to the 20-25 bps range]. It gives us better selection from a securities perspective." She notes that Australia and Norway have already tightened rates, and added, "When one country begins, it's usually within the next 6 months that other countries move."
Cunningham also said, "There's been a slightly different tone to Fed-speak. There's been a lot of discussion about the Fed's statement next week [which] gives us a lot of confidence that we're not going to stay at 0.00-0.25% forever and ever. Although no formal change in rates is expected over the next 6 months, some of the quantitative easing may be taken back, and already has been taken back. The MMIFF is set to expire tomorrow [the unused facility did expire], big yawn, and AMLF and CPFF have dwindled to nothing and a tiny amount."
DB Advisors' hosted a recent conference call where Portfolio Manager Nagesh Gopal said, "If the monetary policy has the desired effect, it will lead to an increase in short-term rates. That will consequently lead to an increased yield from a liquidity management strategies as well. More importantly, the additional collateral due to the Fed's reverse repo program will cause repo rates to rise, which again will provide money funds with incremental yield opportunities in the short-term. Finally, given where we are in the interest rate environment, high quality floating rate securities may be a good idea to add portfolio yield without taking on undue risk."
Gopal added, "Money funds complying with the proposed SEC regulations will be forced to comply with a number of new rules [liquidity buckets, maturity restrictions, no A2-P2].... More importanly, new regulations are likely to suppress money fund yields, and the creation of backstop vehicles, such as liquidity banks, will probably erode yields further."
