Fidelity on Money Markets
Fidelity Investments writes in a "Market Perspective," "Money Markets: Economic Uncertainty, Fed Insights, and New Treasury Supply Report." Written by Nancy Prior, Michael Morin, and Kerry Pope, it says, "Concerns about the economy's health, insights into future Federal Reserve Board policy, and opportunities stemming from new Treasury supply influenced money market activity in February. The economy's true strength has become a focal point for both the Federal Reserve (Fed) and investors, after both January and February data came in weaker than expected. The heart of the discussion centers on whether the economy’s weaker showing was "frozenomics" (i.e., weather-related) or an indication that the economy is indeed slowing.... Fed members made it clear that they would closely monitor economic developments. January's Federal Open Market Committee (FOMC) meeting minutes and Fed Chair Yellen's testimony before Congress reiterated that while not preset, the current pace of tapering would continue unless significant changes occurred in the Fed's economic outlook.... Present policy calls for the Fed to reduce its combined purchases of longer-term U.S. Treasury and government agency mortgage-backed securities by $10 billion per meeting. A statement by Chair Yellen provided new insight with respect to forward guidance. She noted that qualitative factors would also be used in evaluating the labor market and economy, acknowledging that the unemployment rate did not seem to accurately reflect the overall health of the labor market. The January FOMC minutes enhanced forward guidance with a discussion that put two hawkish FOMC members on record as saying they thought the Fed should move off its zero-interest-rate policy as early as the middle of 2015.... The new supply reversed prior conditions in the Treasury bill market. Leading up to the debt-ceiling deadline, the Treasury dramatically cut the size of upcoming auctions to manage its remaining debt capacity. Conditions reversed when the debt ceiling was suspended.... Money market rates, including repurchase agreement (repo) rates rose higher, but the increase was short-lived. Despite the boost in supply, repo rates returned to lower levels within a few days, surprising many. Investors had expected that dealers would have a large supply of collateral from the month's Treasury issuance that would be funded using the repo market. However, the supply of collateral in that market was contained and the amount of available cash was sufficient to return rates back to the low- to mid-single-digits. The repo market has shrunk over the past several quarters, as a result of the onset of financial deleveraging, bank regulatory reform, and lighter demand from low rates.... Fidelity's money market funds took full advantage of the temporary sharp rise in yields that resulted from the heavier supply of Treasury bills and CMBs. Our portfolio managers increased Treasury bill holdings significantly in both general purpose and government funds across a range of maturities. The rise in Treasury yields drove other money market yields higher. We took that opportunity to continue buying three- to four-month Japanese bank offerings; five- to seven-month high-quality, domestic bank holdings; and 18-month U.S. government agency floating-rate notes. Going forward, we expect the economy's health to provide the overarching backdrop for the market's tone. Investors will keep a keen eye on economic data -- particularly related to the labor and housing markets, and consumer activity -- and try to glean insight from any further Fed comments."
