First American PM Commentary
First American Money Market Funds writes in their latest "Quarterly Portfolio Manager Commentary," "The third quarter delivered softer economic data, trade war uncertainty and general market volatility that forced the Fed to deliver rate cuts in July and September and maintain a dovish rate outlook. We believe the remainder of 2019 will most likely bring additional accommodation. The inverted yield curve, breadth of Fed cut scenarios indicated by the market and the emergence of repo volatility brought a challenging investment environment for money fund managers." They tell us, "With the credit environment stable, our main goal was to enhance portfolio yield while judiciously extending the portfolio weighted average maturity (WAM) and weighted average life (WAL) based on our credit, economic, investor cash flow and interest rate outlook. Third quarter fund yields reflected the decrease in LIBOR rates and the inversion of the yield curve. Even with the market projecting additional Fed rate cuts in 2019, the overall investment environment for prime funds remained attractive. We believe relative funds yields will be sustainable and credit environment will remain stable making the sector an attractive short-term cash option for retail and institutional investors." The update explains, "Treasury, agency and dealer repo supply have been plentiful and kept government money market fund yields robust. Toward the end of the quarter, the market experienced dislocation in the repo markets resulting from a cumulation of events that caused repo yields to spike significantly. While the Fed addressed the issue with temporary open market operations, intermittent repo yield volatility continued, resulting in short-term yield spikes in money market funds, benefitting investors overweight overnight Treasury and agency repo. Aside from the repo sector, with rates falling and market sentiment typically dovish, we found opportunities for value added WAM extension elusive, but capitalized on market volatility to buy fixed-rate securities when it made economic sense." First American adds, "In the coming quarters, we anticipate yields on non-government debt will compress due to a dovish Fed, tightening LIBOR levels, positive credit conditions and simple supply/demand dynamics. However, we believe both the institutional and retail prime obligations funds will remain attractive short-term investment options for investors seeking higher yields on cash positions while assuming minimal credit risk. Yields in the GSE and Treasury space will remain influenced by Fed policy and Treasury bill/note supply. Post-quarter end, the Fed announced balance sheet expansion to inject reserves into the banking sector, which we anticipate should create a more normalized repo market and lessened repo volatility. We will continue to seek opportunities – in all asset classes – that arise from market volatility based on domestic and global economic market data as well as changes in our Fed rate expectations."
