Cunningham on low-rate paradigm
Federated Investors' latest "Month in Cash", written by Deborah Cunningham, says, "One of the challenges of doing these monthly updates the past few years is the underlying narrative hasn't really changed all that much. Ever since the Federal Reserve unleashed ultra-accommodation five years ago this month, we've been dealing with a cash yield curve that shifted rapidly and sharply downward. Periodic eruptions in Europe and Washington have added the occasional drama and subsequent bump up in yields -- and we could get another round of such the next few months as yet another potential showdown over a continuing budget resolution and debt ceiling looms. But the struggle for those who deal with the money markets has been and continues to be how to find value in an extremely low-rate environment. If we look beyond this reality, however, there are signs this paradigm may be beginning to shift. We got a taste of this in the minutes from late October's Federal Reserve policymakers meeting. They contained a more optimistic discussion than many expected, raising the possibility that quantitative-easing's bond purchases could begin to slow as early as December.... To be sure, outgoing Fed Chairman Ben Bernanke and other Fed governors were quick to differentiate between tapering, which impacts the longer end of the yield curve, and tightening, which is largely on the cash portion. Even as the Fed tapers and eventually ends QE, it made clear tightening via increases in the target funds rate isn't automatically up next. Labor market and inflation data would have to justify a hike and neither is anywhere close to such now.... Secondly, it appears the overnight reverse repo program the Fed is testing in all likelihood will be extended beyond its January deadline, with the possibility that agency securities will be added to the mix. The reverse repo rates, which started at 1 basis point on Treasuries when the Fed first began offering them in September and now are at the maximum 5 basis points, have acted to set a floor in the marketplace by forcing banks and other overnight repo dealers to raise their rates to attract buyers (as we’ve noted before, why would a buyer pay 5 basis points for a low-risk bank repo if it can get the same rate from the risk-free Fed)."
