Allspring on WAMs, T-Bills, Munis
Allspring Money Market Funds' most recent "Overview, Strategy, and Outlook" discusses the economy, the Fed and the "relentless optimism of market participants." They then ask, "So what have we been up to? Given the backdrop of an FOMC still in the process of raising rates, we tended to conservatively structure our portfolios in favor of keeping excess liquidity over the stated regulatory requirements, running shorter weighted average maturities, and selectively adding fixed-rate securities if the opportunity offered a favorable risk/reward proposition. This has allowed our portfolios to capture the Fed's rate increases fairly quickly, while the enhanced levels of liquidity allow our portfolios to meet the liquidity needs of our investors and help dampen net asset value (NAV) volatility." Allspring writes, "Aside from rate path developments, which have been unambiguously positive, investors have suffered through a supply drought for much of the year. But it finally rained in August: Treasury-bill (T-bill) supply, which fell by almost $600 billion from February through July, rebounded by over $200 billion by the end of August, giving the market a more balanced tone for the first time this year. Supply issues should be more modest over the next few months, with some retrenchment accompanying the September tax receipts, then a steadier course after." They tell us, "The municipal money market yield curve widened dramatically during August as rates on overnight and weekly variable-rate demand notes (VRDNs) and tender option bonds (TOBs) gyrated throughout the month and longer-term fixed-rate paper gapped higher. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index rose to a multi-year high of 1.83% on August 10, up from 1.33% at the end of July. This dramatic increase in short-term rates resulted in a temporary yield-curve inversion in the municipal space; however, this rare occurrence eventually corrected as the market headed into month-end." Allspring adds, "Yields on fixed-rate, tax-exempt paper in the short end of the maturity spectrum began to gap higher in response to the curve inversion. Ultimately, yields on high-grade one-year notes closed out the month at roughly 2.43%, up from 1.57% at the end of July. The sudden increase in tax-exempt rates boosted the relative attractiveness of the sector and, accordingly, municipal money market funds were the recipients of roughly $4 billion in inflows during the month, according to Crane Data. This resulted in a surge in demand for daily and weekly VRDNs. This second-half rebound in demand led the SIFMA Index to close out the month at 1.50%. During the month, we continued to focus our purchases primarily in VRDNs and TOBs with daily and weekly put options in our order to emphasize principal preservation and fund liquidity, and we continued to adopt a conservative posture with respect to weighted average maturities. Accordingly, we remained highly selective in our fixed-rate purchases further out on the curve and opportunistically added term trades to capture the higher rates. However, with lingering questions surrounding the pace of tightening by the FOMC and terminal federal funds rate, we feel it is prudent to remain relatively short for the near future."
