Cunningham on Fed, Rates, Libor
Federated Investors' latest "Money in Cash discusses the Federal Reserve and says, "For cash managers, it was particularly helpful that the March hike and the projections for two more this year and three in 2019 were in line with expectations because we have our hands full with the remarkable amount of short-term Treasury supply in the market. Ever since the suspension of the debt ceiling, the U.S. Treasury has been borrowing at an accelerated rate to fund increased government spending with less revenue from taxes and to build up a cash balance. In fact, short Treasury yields were so elevated that overnight repo rates didn't rise much following the announcement of the hike because they already were nearly there. Not that we, or anyone in the industry, is complaining; it's a wonderful problem to have. Our trading floor has a lot more smiling faces than two years ago. In fact, the excess supply -- furthered by the Fed's balance sheet roll off -- pushed yields so high they were attractive enough for portfolio managers around the country to add Treasuries to their prime products. Holding T-bills for liquidity is one thing; holding them for yield is another. It has been a long time, certainly before the crisis, since we have done that. Our prime products have benefitted from a spike in the London interbank offered rate (Libor), also due to the federal government tax overhaul (see sidebar). Libor's vault over the month had 1-month closing at 1.88%, from 1.65% at the end of February; 3-month at 2.31%, from 1.99%; and 6-month at 2.45%, from 2.20%." Money market CIO Deborah Cunningham adds in the sidebar, "There lately has been concern over the widening of spreads between the 3-month London interbank offered rate (Libor) and the Overnight Index Swap (OIS). Historically, these spreads range between 10-20 basis points, but they are around 60 now. The last time spreads were this wide was during the European bank crisis of 2011. But this time is entirely different. It's not credit related, but rather due to the new tax code requiring U.S.-based companies to repatriate overseas cash. These companies traditionally buy Treasury bills, commercial paper and bank CDs with that money. Now, they have to bring it here and pay taxes. This has slashed the demand for short-term securities, driving up their yields and overnight funding spreads. While the Treasury issuance may pull back as tax receipts stream in after April 15, repatriation likely is going to play out over the entirety of 2018."
