Allspring on the Fed, Muni Sector
Allspring Money Market Funds latest "Overview, Strategy, and Outlook" tells us, "Currently, the futures market expects the FOMC to increase rates 50 bps at its December meeting and is torn between 25 bps and 50 bps at the early February meeting. 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." On the "`Municipal sector," they write, "The municipal money market yield curve continued to steepen during the month of November as strong inflows drove demand for overnight and weekly variable-rate demand notes (VRDNs) and tender option bonds (TOBs) during the first half of the month. However, municipal money market fund assets broke their streak of strong inflows, dropping about $3 billion in the last week of the month, according to Crane Data, as municipal-to-taxable ratios fell to extremely rich levels. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index also continued to fall, closing out the month at 1.85%, down from 2.24% at the end of October. Further out on the curve, rates on high-grade notes in the one-year space fell to 3.02%, down from 3.33% at the end of October." Allspring adds, "During the month, we continued to focus our purchases primarily in VRDNs and TOBs with daily and weekly put options in order to emphasize principal preservation and fund liquidity. We also continued to adopt a conservative posture with respect to weighted average maturities given the likelihood of additional rate hikes by the FOMC. Accordingly, we remained highly selective in our fixed-rate purchases further out on the curve and opportunistically added term trades to capture higher rates."
