Allspring Comments on Rates, Munis
Allspring Money Market Funds' latest "Portfolio Manager Commentary," tells us, "Against a backdrop of risk assets underperforming due to the prospect of Fed rate hikes coupled with the Russian invasion of Ukraine, money markets have exhibited relative calm, providing investors a valuable way to limit long duration and credit exposure by participating in the front end of the rate and credit curve. In the money fund universe, weighted average maturities have come down recently to capture the potential impact of the FOMC raising rates, while widening credit spreads out the curve haven't had a meaningful effect on money market securities. The yield pick-up from one-month to six-month London Interbank Offered Rate (LIBOR) was roughly 25 bps at the end of the year but has since widened to almost 60 bps on expectations of the FOMC actively removing monetary accommodation." It also says, "We tend to take a conservative approach when constructing our portfolios and favor keeping excess liquidity over the stated regulatory requirements, running shorter weighted-average maturities and looking to extend if the opportunity offers a favorable risk/reward proposition. This additional liquidity buffer enhances our ability to meet liquidity needs of our investors and helps stabilize net asset value (NAV) volatility, while still allowing us to opportunistically add securities to lock in higher yields if the opportunity arises." On "Municipal money markets," Allspring writes, "The municipal markets continued to exhibit overall softness as both long-term and money market funds experienced moderate outflows again this month. Demand for overnight variable-rate demand notes (VRDNs) and tender option bonds (TOBs) remained exceptionally strong as buyers stayed focused on maintaining high degrees of liquidity during bouts of volatility this month. Rates on overnight paper closed out the month at 0.09%, down from 0.12% in January. However, further out on the curve, rates experienced a significant backup. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index gradually rose to 0.20% at month-end, up from 0.06% the prior month. Secondary inventory of VRDNs and TOBs remained at elevated levels, and rates on high-grade tax exempt commercial paper rose roughly 20 to 30 bps during the month, with yields ranging from 0.30% to 0.50% in the two-month and three-month space.... During the month, we continued to focus our purchases primarily in VRDNs and TOBs with daily and weekly put options, in order to preserve principal and provide ample fund liquidity. Our funds benefitted from their large exposures to SIFMA-based floaters as rates rose throughout the month. Additionally, we remained highly selective in our fixed-rate purchases further out on the curve as the outlook for monetary policy remained uncertain."
