Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" discusses the Federal Reserve's recent discussions on rates and monetary policy. They write, "Money market investors, while obviously caring deeply about the Fed's potential interest rate path, also have occasionally found gems in the minutes about monetary policy implementation, details that might matter greatly to the money markets but are afterthoughts to longer-term investors. For example, the development and evolution of the Fed's reverse repurchase program (RRP) over the past five years was revealed bit by bit over time in the minutes."
The commentary continues, "The minutes of the May 1–2 meeting, during which the Federal Open Market Committee (FOMC) took no actions on interest rates and just tweaked its statement, were released on May 23. They contained one of those implementation gems -- a proposed 'small technical realignment of the interest on excess reserves (IOER) rate relative to the top of the target range for the federal funds rate,' as the minutes reported."
Wells Fargo says, "In the end, this adjustment is about keeping the federal funds effective (FFE) rate, lately at 1.70%, comfortably in the Fed's target range, currently set at 1.50% to 1.75%. [This commentary was prior to the Fed's latest hike.] If the FFE rate were to consistently stray from the target range -- which it could, given that the federal funds market is, after all, ultimately governed by the actions of many individual participants -- investors could begin to doubt the Fed's ability to credibly implement monetary policy. Essentially, the FFE rate had lately begun trading nearer to the top of the target range than the Fed was comfortable with, and it expects to take a modest step to move the FFE rate back down in the range."
They continue, "As noted earlier, with the FFE rate currently at 1.70%, the spread between it and the IOER has shrunk to 5 basis points (bps; 100 bps equal 1.00%), down from 9 bps just in the past six months.... As the FFE rate rose in the range and that spread narrowed, the Fed apparently felt the heat, and its technical adjustment is the result. Specifically, the proposed technical realignment would keep the RRP rate at the bottom of the FFE range but move the IOER rate down 5 bps, setting it 5 bps below the top of the FFE range."
Commenting more on the recent rate increase, Wells tells us, "If the realignment happens concurrently with an expected June rate hike, and it should, as the minutes note that the many have blessed such a move, then the new FFE target range in mid-June will be 1.75% to 2.00%, with the RRP set at 1.75% and the IOER set at 1.95%. The Fed apparently feels that the relative lowering of IOER will help keep the FFE well within the target range by bringing the rates on all short term instruments down."
The PMs also discuss LIBOR, saying, "The London Interbank Offered Rate-Overnight Investment Swap (LIBOR-OIS) spread continued to narrow off its dramatic March widening. We saw the spread decrease 6 bps in the second half of April and another 9 bps in May as the supply/demand imbalances continue to work out of the system. Some of the factors that caused the dramatic widening have played themselves out or the actual news wasn't as impactful as expected. For example, the ramp up in T-bill issuance in March ($332 billion) after the resolution of the debt ceiling was followed by a $120 billion reduction of issuance in April as tax receipts reduced the need to issue bills, allowing demand to catch up with supply. And May was a fairly ordinary T-bill issuance month with roughly $17 billion of net new supply meeting sufficient demand to keep yields in check."
Finally, they add on the Municipal sector, "After experiencing outflows of roughly $4 billion during March and April due to seasonal tax payments, municipal money market fund assets staged a remarkable turnaround during the month of May, increasing an astounding $6.2 billion, according to Crane Data. Investors looked to take advantage of the sudden increase in attractiveness of municipals as the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index spiked to a multiyear high of 1.81% on April 18, up from 1.58% at the end of March. Crossover and traditional investors alike were quickly attracted to the municipal sector following the meteoric rise in rates that resulted in the SIFMA/1-week LIBOR breaking the 100% barrier during the month of April. But, as they say, all good things must come to an end."
In other news, Charles Schwab has filed to liquidate another money market fund, close on the heels of eliminating its Schwab Money Market Fund. A Prospectus Supplement for Schwab Advisor Cash Reserves tells us, "At a meeting held on June 5, 2018, the Board of Trustees of The Charles Schwab Family of Funds … approved the liquidation of, and the related Plan of Liquidation for, Schwab Advisor Cash Reserves." (See our May 29 News, "`Schwab Money Market Fund Liquidates, Shift to Bank Deposits Continues.")
It explains, "In accordance with the Plan of Liquidation, the Fund will redeem all of its outstanding shares on or about October 31, 2018, and distribute the proceeds to the Fund's shareholders in an amount equal to the shareholder's proportionate interest in the net assets of the Fund.... Additionally, the Fund anticipates making a distribution of any taxable dividends and capital gains of the Fund prior to or on the Liquidation Date."
Schwab comments, "As the Fund approaches the Liquidation Date, the Fund will wind up its business and affairs, and will cease investing its assets in accordance with its stated investment policies. On or before the Liquidation Date, all portfolio holdings of the Fund will be converted to cash, cash equivalents or other liquid assets. As a result, the Fund will not be able to achieve its investment objective and will deviate from its investment policies during the period as it approaches the Liquidation Date."
Additionally, they say, "The Fund's investment adviser will bear all expenses associated with the liquidation other than transaction costs associated with winding down the Fund's portfolio and effective September 5, 2018 through the Liquidation Date, the Fund's investment adviser will waive the Fund’s management fee. The liquidation is not expected to be a taxable event for the Fund."
