Fidelity Investments recently posted a "Fixed Income Quarterly Perspectives" video where, according to the site, "Portfolio managers Julian Potenza and Maura Walsh discuss fixed income market performance in the first quarter 2019 and the impact on money market flows." Money Market Portfolio Manager Walsh comments, "We've seen a significant shift in expectations for further rate increases by the Fed in a relatively short period of time. At their December meeting, the Fed forecasted two rate hikes in 2019, and by their March meeting, the Fed forecast showed no rate hikes in 2019." We quote from the video, and also excerpt from recent Portfolio Manager commentary from Wells Fargo Funds and from PGIM, below.
Fidelity's Walsh explains, "We closely watch the Fed funds futures market to monitor and market expectations of future Fed moves.... The Fed funds futures curve at the end of September 2018 ... shows the market was pricing in two further rate hikes by the Fed in 2019, in line with the Fed's December forecast.... The Fed funds futures curve as of the end of December of 2018 ... shows a shift in expectations from additional rate hikes to a Fed on hold. The markets expectation as to where the Fed funds rate would be at the end of 2019 was well below the Fed's forecasts."
She continues, "The Fed funds futures curve as at the end of March this year [saw] expectations for the future Fed funds rate move lower again, signaling that the market expects a lower Fed funds rate than the March Fed forecast.... The futures market is currently pricing in over a 50 percent chance that the Fed will lower rates by year end. (Note: This video is dated 5/24, and expectations for a rate cut have increased noticeable since then. Google says, "The fed funds futures market is pointing to a nearly 70% chance of a rate cut in July and about 60% probability of three rate cuts this year, according to the CME FedWatch tool.")
Walsh tells us, "Even though the Fed may not raise rates again this year, money market funds are an attractive investment option for shareholders that value the stability, liquidity and return they provide, especially given the flat yield curve. Government money market fund averages are currently yielding around 2 percent. While Prime category averages are yielding around two and a quarter percent."
She says, "Flows into money market funds have been steady over the past year or so, as they are an appealing option when compared to bank products. This chart compares the yields of both bank money market deposit accounts ... and bank savings accounts ... to a yield of a broad index of taxable money market funds.... The shaded area represents the midpoint of the Fed funds target range."
Walsh comments, "As the Fed raised rates, money market funds pass through the rate hikes relatively quickly with average yields above 2 percent at this past quarter end. Bank yields, however, which are administered rates set by the individual bank, are typically much slower to respond to an increase in short term interest rates and on average were yielding below a quarter of a percent as of the end of March. With money market fund yields well above those of bank products the flows into money market funds over the past year or so have been solid industry-wide."
Finally, the Fidelity PM adds, "Taxable money market fund assets under management increased by approximately $220 billion over the last 15 months, to a nearly $2.9 trillion at the end of the first quarter.... Asset growth was driven primarily by robust flows into prime money market funds. Prime Retail fund assets ... grew by 43 percent from $267 billion to $379 billion while Prime Institutional fund assets ... grew by 33 percent, from $189 billion to $243 billion. The asset flows on the government side were led by retail funds ... which increased by 12 percent to $639 billion. Institutional government fund growth ... was virtually unchanged over the period with assets under management ending the quarter at $1.63 trillion. So clearly the short end of the curve is resonating with investors, given the growth we're seeing in money market assets under management."
Wells Fargo Money Market Funds, in their latest "Overview, strategy, and outlook," tells us, "Government money market yields fell in May because, much like the effects on a teenager hanging with the wrong crowd, all the influences were negative. First, on May 1, the Federal Reserve (Fed) made another technical adjustment to Interest on Excess Reserves, cutting the rate by 0.05% to try to nudge the federal funds effective rate back down near the middle of the Fed's target range. Although these technical adjustments are not meant to signal any intent about the future path of interest rates, they do have a real and pretty immediate impact on money market rates."
They write, "The second factor weighing on yields was the ongoing reduction of Treasury bill (T-bill) supply, continuing the usual seasonal contraction that follows the mid-April tax date. T-bill supply has fallen by $126 billion since then, with further reductions to come as the second quarter continues."
The Wells piece states, "The last major influence on rates has been a robust Treasury market rally all along the curve, as the bond market continues to predict interest rate cuts by the Fed. This has affected the money markets in two ways. First, with cuts now expected by the market as soon as this year, money market rates have begun to reflect the anticipated lower rates. In addition to this direct effect, the fact that you have to go out about 20 years to find a Treasury security that can out-yield money market instruments has enticed some investors into the space, boosting demand and therefore pushing yields down."
Finally, Wells comments, "All these negative factors so far make 2019 the opposite of the halcyon days of 2018, when booming T-bill supply and a steadily hiking Fed helped yields march higher. Although the Fed professes patience on rates, surprises on the U.S. economy or any of a number of geopolitical issues could encourage it to move sooner than it intends."
