Federated's Cunningham on Rates
Federated Investor's Debbie Cunningham posted her August "Month in Cash" column, "About That Elephant in the Room," where she touched on rates and reforms. "Before we discuss what's happening -- and more accurately, what isn't -- on the rate front, let's get the elephant in the room out of the way. As most if not all of you know by now, the Securities and Exchange Commission has adopted new rules for money-market funds, the most notable of which will require net asset values (NAVs) to fluctuate on institutional prime and institutional municipal money-market funds -- Treasury, government and retail funds are exempt. First, it's important to understand this change won't take effect for two years. But I do expect our industry to begin to react sooner than that with new options and products for clients. Might the SEC-mandated changes impact money-market rates? Potentially. Let's say some institutions opt to move into products other than money funds, such as bank CDs. That could have the effect of lowering money fund demand. Maybe the economy continues to improve, driving up the use of corporate finance and commercial paper. That could have the effect of boosting the supply of potential money-fund portfolio securities. Together, less demand/more supply could conspire to push up money-fund security yields. But if that were to happen, the higher yields very well could lure back investors who left the market, raising demand again and driving down yields." On rates she continues, "As for the current money-market environment, there was little movement along the cash-yield curve over the past month -- rates remained stubbornly low, save for a slight steepening on longer end of the curve that corresponds both to the end of quantitative easing and the initial moves up in the target funds rate. The consensus is still for a May-June 2015 tightening, a view the statement from this week's Fed policymakers meeting did nothing to dispel despite grumblings from a few regional Fed presidents that the target rate should be raised sooner and despite second-quarter inflation numbers that were reported the same day and came in right in line with Fed targets. I think what's most important for dictating the path of short-term rates is what happens with the employment, housing and inflation. The employment picture is pretty strong and continues to strengthen, but both inflation and housing have stuck in a sort of two-steps-forward, one-step-back mode. You'll get good number on housing starts, then the home price drops in certain regions. You'll get CPI up one month, then PPI down, or energy prices up and health-care down. It's all fuzzy and a bit uncertain, and I think that's the way rate policy will be for the time being." Note: Federated also released an "Overview of key SEC changes to money-market fund rules, a handy reference that encapsulates all of the SEC reforms. See alsom Bloomberg's "Half-Trillion-Dollar Fund Exodus Magnifying U.S. Bill Shortage".
