Wells PMs on CP, Prime, Munis
Wells Fargo Asset Management's latest "Portfolio Manager Commentary comments, "The Fed reported that the amount of commercial paper outstanding (not seasonally adjusted) rebounded this month from the usual quarter-end dip experienced in September. The total outstanding amount again topped $1 trillion after surpassing that mark at the end of August and falling back under at the end of September. Comparing October's outstandings to those at the end of August, nonfinancial paper and financial paper, both domestic and foreign, are up 3.8% and 1.8%, respectively. This increase in supply has been matched by a $12 billion increase in demand from prime institutional money fund assets during October (as reported by Crane Data) so that effect on rates has been neutral. Rather, rates have been driven higher, as evidenced by the change in LIBOR (London Interbank Offered Rate) levels, in anticipation of the Fed tightening in December. As the December 13 FOMC date rolled into the term of three months, the rate of yield increase accelerated, with benchmark three-month LIBOR rising 1 bp between August and September, compared with 5 bps during October. If three-month LIBOR lands again at 1.50% on December 13, like it got to 1.25% on June 14, the date of the last tightening, we believe there is the possibility of an increase of about 2 bps per week until the meeting." The update also comments, "The gradual pace of Fed tightening has enabled prime money market funds to opportunistically extend weighted average maturities (WAMs) and weighted average lives (WALs) to take advantage of what yield pickup there is from extension out the curve. While the average maturity for institutional prime funds has hovered in the mid-20s for the past several months, our funds' WAMs have been slightly lower at around 20 days recently (with WALs closer to 60 days) in an effort to maintain increased amounts of liquidity and to be in a position to more quickly capture the effects of future rate hikes. In this environment we continue to construct what we believe are high-quality portfolios that are focused on liquidity while opportunistically purchasing floating-rate notes to incrementally increase yields." Wells' piece adds, "Yields in the municipal money market space remained steady during October as moderate asset growth in municipal money market fund assets fostered support for the short end of the curve. In the overnight sector, yields on variable-rate demand notes (VRDNs) and tender option bonds (TOBs) followed typical reinvestment demand patterns, resetting in a narrow band between 0.85% and 0.95% during the month. In the weekly sector, the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index fell slightly from the multiyear high of 0.94% reached on September 27 but remained in a comfortable range of 0.91% to 0.92% for the month.... Despite the modest increase in rates on the long end, the municipal money market yield curve remains flat on a relative basis versus taxable securities."
