Allspring MMFs on RRP, Higher Rates
Allspring Money Market Funds' latest "Overview, Strategy, and Outlook" discusses the Fed's RRP program and higher yields. They write, "In the government space, the appeal of investments is measured against the rate on the Fed's reverse repurchase (repo) program (RRP), factoring in expected changes in the RRP rate during this hiking cycle. The RRP has performed its job of reinforcing the lower bound of the Fed's target rate admirably, keeping market repo rates anchored near the RRP rate and planting the EFFR firmly in the target range. Given that the RRP is routinely taking in about $2.2 trillion per day from investors who view it as the best place for their money, it follows that those investors must not view the potential alternative investments as very appealing at all. As we've mentioned throughout the year, this has largely been the result of a supply shortage in the space, especially of Treasury bills (T-bills). The T-bill supply situation has varied throughout the year, with investors suffering through much of the spring and early summer as the Treasury digested the larger-than-expected tax payments it received in April, with the excess cash it received then lessening its need to borrow.... [S]upply has been a roller-coaster this year, with strength to start the year, followed by the long slump induced by spring tax receipts, leading to a late-summer bump that was interrupted again by tax receipts, this time in mid-September. The last half of October saw supply begin to rise again, in what should be a steady climb throughout the fourth quarter." Allspring also comments, "You'll know when supply increases have pushed yields high enough to pique investor interest when the RRP balances start to fall materially and consistently. This is likely to be a 2023 story." On the "Prime sector," they write, "As one would expect in this scenario, where the FOMC is actively communicating its intentions to combat inflation and inflation expectations and not fall further behind the curve, yields continued to increase. Year to date, the six-month London Interbank Offered Rate (LIBOR) yield is higher by roughly 460 bps to 4.92% and the three-month LIBOR is higher by roughly 438 bps to 4.46%. Additionally, higher rates have affected risk assets in general where, for example, the broader stock market, as measured by the S&P 500 Index,1 has declined by more than 19% year to date. As a result, the front end of the yield curve offers an attractive risk/reward proposition compared with other asset classes." Allspring adds, "Given the backdrop of an FOMC still in the process of raising rates, we tend to conservatively structure our portfolios in favor of keeping excess liquidity over the stated regulatory requirements, running shorter weighted average maturities, and looking to fixed-rate securities if the opportunity offers a favorable risk/reward proposition. This has allowed our portfolios to capture the Fed's rate increases quickly, while the enhanced level of liquidity allows our portfolios to meet the liquidity needs of our investors and helps dampen net asset value (NAV) volatility."
