Federated Investors Global Money Markets CIO and Senior Portfolio Manager Deborah Cunningham discusses her "2017 Outlook in the latest "Month in Cash commentary, and also in a new video entitled, "Will the Fed and Trump administration play nice? Cunningham discusses the Fed, flows, floating NAVs (or lack thereof) and the benefits of a regulatory rollback for money market funds. Federated writes, "The Federal Reserve met expectations -- essentially 100% of them -- by hiking its target rate in mid-December. That's good news, of course, but don't get used to expectations being met in 2017. It is setting up to be volatile, with expectations a little too positive amid many unknowns. One uncertainty is the tease the Federal Open Market Committee gave with new "dot plot" projections indicating the potential for three hikes in 2017. The market seems to have bought it. We still think two are more likely, although coming in March and September rather than June and December. That shift would leave open the possibility for a third move in December."
They explain, "The largest variable is the fiscal policy the Trump administration will officially propose. We know less about his plans than those of any incoming administration in recent times. That spells volatility, even though its impact won't be felt immediately. We have been conditioned in recent years to look to monetary policy alone for action on the economy. Now we should finally have real fiscal changes to consider. Expectations again play a role as people have high hopes for the positives Trump could serve up. We hope those will be met and that the Fed will keep its upward momentum, but there is plenty of room for disappointment.... It might not take much to throw the Fed off course again."
The update continues, "But the most significant element in 2017 could relate to regulation -- specifically the peeling back of some. This would be a boon to cash managers. While the recent money market fund reform is likely to remain, other regulations also have impacted us. Over the course of 2016, banking regulators influenced the patterns and predictability of issuers, leading many to cut back issuance lest they not have the required liquidity levels. This uncertainty was detrimental to the industry; money markets need short-term financing to work smoothly. It would help tremendously if banks were able to issue more 1-, 2- and 3-month commercial paper and CDs without worrying about being penalized. Thankfully, the U.S. Treasury stepped in and issued more bills and notes to bridge the gaps in 2016. But if banking regulations get rolled back to some degree, it should make for a more productive world for cash managers and their clients."
Federated's monthly adds, "Overall, we are positive about 2017 and see upward steps for cash management. Yields most likely will increase as we get Fed moves, and there has been little movement in the net asset values (NAVs) of fluctuating NAV money funds in the industry as a whole. None of our floating-NAV funds deviated from the $1.0000 share valuation around the recent Fed move. We are still targeting our weighted average maturity to a range of 40-50 days for our prime and government money funds, and the London interbank offered rate (Libor) continues to be supportive. December ended the year on an upbeat note, and it may very well be a happy new one."
In the video, Cunningham was asked what her outlook is for rates in 2017. She tells us, "Our expectation would be for two 25 basis point rate increases in 2017, which is really unchanged from where we've been since the middle of last year. What has changed would be the timing of those rates moves. We were originally considering something that was more like June and December for those rate increases.... I would say now [we] are more in line with what would be a March and September expectation, which would leave them a little wiggle room at the end of the year if we continue to see a need for increasing rates at that point."
She was asked for her outlook on the money market landscape in 2017. Cunningham explains, "I think at this point with rates above the abysmal level, the expectation would be that we start to see some cash flow back in from an industry stand point." She states, "The industry from an asset standpoint has been very steady, around $2.7 trillion, for the last several years.... The expectation would be that with increasing rates, and overall higher yields and spreads, that you would see government products continue to do well from a cash flow perspective. But perhaps prime and muni products that have been disenchanted from a user-ship standpoint because of money market reform maybe gain a little traction just simply because their spread is a little bit more attractive at this point."
Finally, Cunningham ends the video with her opinion on how the Fed will operate under a Trump Presidency. She comments, "Given that the Fed is an independent entity, we do think that they will continue their independence throughout 2017. But obviously they have to coexist and work productively with the current administration. So given that the Trump Presidency will likely involve a little bit more stimulus, a little higher growth from a GDP perspective, and with that a little bit higher inflation, `what we think is in store is the Fed that becomes a little bit more cautious. The Fed has certainly been very accommodative over the course of the last several years and we do think that there will be more caution that is brought into the picture from a Fed standpoint for 2017."
In other news, a Prospectus Supplement for BlackRock's money funds obtains permission for an "interfund lending" program. It explains, "The Funds have received an order from the Securities and Exchange Commission granting exemptions from certain provisions of the Investment Company Act of 1940, as amended, and rules thereunder, including a provision requiring that certain borrowings be made only from banks. Pursuant to the Order, the Funds may participate in an interfund lending program (the "Interfund Lending Program") under which each Fund may lend money directly to and borrow money directly from certain other open-end BlackRock funds, including the Funds, for temporary purposes, to the extent consistent with its investment objectives, restrictions, policies, limitations and organizational documents, and subject to the conditions of the Order."
The filing explains, "Pursuant to an exemptive order granted by the SEC, an open-end BlackRock fund, including a Fund, to the extent permitted by its investment policies and restrictions and subject to meeting the conditions of the IFL Order, has the ability to lend money to, and borrow money from, other BlackRock funds pursuant to a master interfund lending agreement. Under the Interfund Lending Program, BlackRock funds may lend or borrow money for temporary purposes directly to or from other BlackRock funds.... All Interfund Loans would consist only of uninvested cash reserves that the lending BlackRock fund otherwise would invest in short-term repurchase agreements or other short-term instruments. Although the Funds may, to the extent permitted by their investment policies, participate in the Interfund Lending Program as borrowers or lenders, they typically will not need to participate as borrowers because the Funds are money market funds and are required to comply with the liquidity provisions of Rule 2a-7 under the 1940 Act."
Finally, it adds, "If a BlackRock fund has outstanding bank borrowings, any Interfund Loans to such BlackRock fund would: (a) be at an interest rate equal to or lower than that of any outstanding bank loan, (b) be secured at least on an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding bank loan that requires collateral, (c) have a maturity no longer than any outstanding bank loan (and in any event not over seven days), and (d) provide that, if an event of default occurs under any agreement evidencing an outstanding bank loan to the BlackRock fund, that event of default will automatically (without need for action or notice by the lending BlackRock fund) constitute an immediate event of default under the interfund lending agreement, entitling the lending BlackRock fund to call the Interfund Loan immediately (and exercise all rights with respect to any collateral), and cause such call to be made if the lending bank exercises its right to call its loan under its agreement with the borrowing BlackRock fund."
