Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary comments on the U.S. Government sector, "These are historic times in the money markets, without a doubt, the kind of thing you'll tell your grandkids about one day, if they would have any idea what you’d be talking about. Aggregate government and Treasury fund assets have ballooned since the beginning of the year, increasing from $1.2 trillion to almost $2 trillion, with about a quarter of that growth -- $231 billion -- coming in September alone. Almost certainly, October will see additional inflows." (Note: Government assets have increased by an additional $108 billion through Thursday, Oct. 13, according to our Money Fund Intelligence Daily.) Wells' update continues, "But while the upheaval in the prime and municipal spaces has had dramatic effects on borrowers, both private and public, and interest rates, as seen in the rapid rises in LIBOR and SIFMA discussed in the other sections, the robust inflows into the government space have been handled without much of a fuss, at least so far. While demand has been relentless, the dramatic market dislocations seen in the other sectors have yet to materialize. Probably the biggest effect so far has been the contraction in yield spreads between government-sponsored enterprise (GSE) discount notes and U.S. Treasuries. Investors typically demand a higher return from discount notes, as they are considered to be not quite as pristine from a credit-quality perspective as direct U.S. Treasury instruments.... GSE discount notes yielded about 7 bps more than Treasury bills (T-bills) on average in 2015, and that spread has steadily fallen in 2016, nearing zero recently.... With all the new demand, investors have essentially viewed any spread over Treasuries as attractive, flocking to those investments whenever they pop up."
