Yesterday, online money market mutual fund trading platform ICD Portal published the brief, "How are Corporates Impacted by Rate Change?" They tell us, "Today the Federal Reserve cut the Fed Funds rate by 25bps, dropping from 2.5% to 2.25%. Historically, the effects on banking products in a falling rate environment is usually immediate as rates will adjust to the current fed funds position. Corporate investors have already witnessed a lower yield on their banking products in advance of the anticipated rate decrease. [But] MMFs will likely experience a slower impact from rate reductions than that of bank deposits, based on the fact that MMFs traditionally hold positions further out on the curve. On Government MMFs, we expect half of the anticipated rate to be recognized almost immediately after the rate cut, depending on the percentage of portfolio in overnight investments, with the other half coming over a period roughly in line with the weighted average maturity of the portfolio." They tell us, "Prime MMFs, however are expected to fall at a slower rate. Prime Funds are structured to maximize yield. And as such, WAM will not adjust fully until roughly 30 days after the Fed rate move.... Depending on the bank, the balances and the client's relationship with the institution, yield varies for banking products. Some clients report rates that approach Government MMF rates, while others see much less attractive rates offered.... We expect the yield for MMFs to take weeks to adjust after a Fed rate cut. Therefore, the spread is expected to widen within the first month between Prime & Government Funds." ICD's missive quotes our Peter Crane, "Historically, money fund yields have lagged direct money instruments following Fed hikes or cuts. So we expect cash to shift away from instruments like repo and commercial paper and to shift into funds to 'ride the lag', taking advantage of the older, higher-yielding securities in funds' portfolios."

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