Federated Hermes' Deborah Cunningham writes, "Not so smooth. It's time for the Fed to raise overnight rates." She tells us, "With the recent surge in retail sales and jump in gross domestic product growth, you would think the commercial paper market would be robust. But issuance has been flat, which tells us that the spike in bonds many companies offered in 2020 for insurance as the economy tanked has left them flush with cash. As the recovery gains more steam and inflation creeps up, we anticipate more paper to be issued. Concerning inflation, it is curious how the market keeps trying to lead the Fed. While price pressures are increasing and many consumers are itching to spend stimulus checks, the Fed has been deflecting every suggestion of tightening. Investors don't seem to believe that the Fed wants the economy to be piping hot and that it considers the recent rise in activity as lukewarm. We think it could start to taper purchases this year, but no indication yet. These days, the Fed seems happy to make everyone wait." Cunningham adds, "One note on the new Bloomberg Short-Term Bank Yield Index (BSBY). The industry has been waiting for a firm to issue a security tied to it, and Bank of America did so in April. No money funds bought it, but it was taken up by a Local Government Investment Pool and some other lenders. As the index grows in usage, our expectation is that we and the industry will participate regularly. The International Organization of Securities Commissions blessed it last month, so it is chugging along on the track to becoming the index that prime funds will use to replace the London interbank offered rate (Libor). Industry-wide, government money markets grew slightly in April, while prime and tax-free funds faced modest outflows. We kept the weighted average maturities of our money funds in target ranges of 35-45 days for government and 40-50 days for prime and municipal."

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