Allspring MMFs on Debt Ceiling, Fed
Allspring Money Market Funds' latest "Overview, strategy, and outlook," tells us, "The debt ceiling has disrupted the government money markets for much of this year -- sometimes in the headlines and sometimes quietly in the background -- and it appears this will continue right through the bitter end of 2021.... [T]the additional roughly $750 billion supply crunch (unnecessary but for the debt ceiling) starved the markets of investment opportunities and drove cash into the Federal Reserve's (Fed's) reverse repo program (RRP), the investment of last resort. As a result, the RRP now routinely takes in between $1.3 and $1.6 trillion daily." It explains, "When the debt ceiling is finally resolved, the Treasury will likely increase T-bill supply to steadily rebuild its cash balance, which may result in one more market disruption -- modest but welcome as the market digests the additional supply. When all is said and done, the RRP balance may drop by roughly the amount that the Treasury's cash balance increases. Then we can exhale and wait for this exercise to begin anew whenever the ceiling comes into view again. Apart from the debt ceiling, the government markets may need to fine-tune timing estimates of eventual Fed rate hikes.... With a quicker pace of tapering a distinct possibility, markets started to anticipate the Fed would complete tapering as soon as March 2022. While it has been stated repeatedly that a liftoff of target rates won't occur until the Fed has ceased asset purchases, this accelerated tapering would give the Fed flexibility to begin tightening monetary conditions as soon as the March meeting, though markets still reflect expectations of starting in the summer of 2022." Allspring's PMs add, "`As the FOMC moves closer to moving its target rate higher, London Interbank Offered Rate (LIBOR) settings continue to climb as well. Three-month and six-month LIBOR were up 4 basis points (bps; 100 bps equal 1.00%) in November. One-year LIBOR increased 2 bps month over month but had increased by as much as 11 bps the week of Thanksgiving. Once again, one-month LIBOR stayed anchored around 9 bps. The very front end of the rates market continues to steepen as the possibility increases that the FOMC will move their target rate higher in 2022, while the longer end of the Treasury curve is weighing the risk of Fed tightening affecting economic growth and causing the yield curve to flatten. If price underperformance of longer-term Treasuries persists, focus on the front end of the yield curve might provide an option to reduce price volatility on fixed income investments."
