Citi's Rai on Rates and MMFs
Citi Strategist Vikram Rai writes "2015: Are We Crying Wolf Again?" in his latest "Short Duration Strategy" piece. He says, "At the start of 2014, a forecast for higher rates was the consensus view among market experts though there was significant dispersion with respect to views on the timing of the Fed's first rate hike. This year, at first blush, it seems like there is less consensus among strategists across the Street regarding either the level of rates or the timing of the first rate hike -- i.e. the dispersion in views has actually increased vs. last year! Some market experts are forecasting hikes to the tune of 100–150bp in 2015. Citi economists expect the Fed to increase policy rates by only 25-50bp in 2015 though the lift-off date may be mid-2015 or later depending on economic conditions. Citi does believe that the Fed will begin hiking rates this year though we are also of the view that the upcoming hiking cycle will be different from prior cycles. This is because financial market conditions will play a much more important factor in the pace of Fed rate hikes this time around vs. 2004-2007, when the Fed tightened almost continuously in 17, 25bp increments to bring the Fed rate to 5.25% from 1%." It continues, "Even with higher market rates, it is unlikely that focus for cash investors will shift to yield from liquidity and asset preservation. But roughly $1.4TR has moved into non-interest bearing bank accounts since 2008 and with higher market rates, we expect that depositors will be less willing to leave cash with large banks at zero rates. Historical data shows increased flows into MMFs after rate hikes though these flows typically lag the hikes.... [W]e expect that in the short term larger banks may actually be relieved to see some cash leave their balance sheet and are unlikely to compete with money funds by increasing their deposit rates. While money market reform has reduced the appeal of institutional prime funds, so far we see little evidence of large outflows though this could change as we approach compliance date." Citi's Andrew Hollenhorst also writes "Will Short Rates Stay Elevated?" in recent commentary, saying, "As we approached year end, we expected the temporary increase in the Fed's ON reverse repo (RRP) rate and the availability of $300 billion in Fed term reverse repo to keep rates somewhat elevated. Even so, we were surprised at how supported rates remained coming into year end. Perhaps more surprising is the fact that short-term rates including 3m LIBOR, Fed effective and repo have remained high even as we have moved into the new year."
