Allspring Money Funds on Fed, QT
The latest "Overview, Strategy, and Outlook" from Allspring Money Market Funds discusses the Fed, QT and RRP. They write, "In the money markets, QT will eventually have significant effects. First, it will tend to boost Treasury market supply, because any security not rolled over by the Fed will instead need to be issued by the Treasury to private (non-Fed) buyers. This effect should be gradual, and exactly how it impacts the money markets will depend on the degree to which the Treasury skews its additional supply to Treasury bills, compared with longer-term notes and bonds. The second way money markets will feel QT will be through a normalizing of the overnight repurchase agreement (repo) market. With nearly $2 trillion routinely parked in the Fed's reverse repo program (RRP), there's currently an absurd abundance of excess cash, making it a borrowers' market. After QT has been long underway, the excess cash pile will diminish, and more securities in private hands will need to be funded in the repo market. This may be a several-years-long process, but eventually supply and demand should find a new equilibrium, where repo rates are set by market interests rather than being pinned at or below the Fed's RRP rate as they are now." The piece adds, "For the Allspring Funds, we continue to focus on what the FOMC is saying and positioning for future policy rate increases. Since 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 allowed our portfolios to capture this rate increase quickly. In addition to capturing higher yields, the enhanced liquidity buffer allows our portfolios to meet the liquidity needs of our investors and helps stabilize net asset value (NAV) volatility."
