Allspring MMFs on the Govt Sector
Allspring Money Market Funds latest "Overview, Strategy, and Outlook" comments on the "U.S. Government sector," "Without a doubt, the aforementioned dynamics between the Fed, inflation, and the markets were the leading story of the year, resulting as they did in interest rates about 3.50% higher now than projected by the Fed and the markets a year ago. If the Fed's battle with inflation was the headliner, though, there was another smaller story playing out -- one about government security supply, the changes in which pushed yields around even as they generally rose with the Fed's moves. The two largest components of supply in the government money markets are Treasury bills (T-bills) and the Fed's reverse repurchase (repo) program (RRP), which together are always (as currently constructed) sufficient to meet demand. That's because the Fed built the RRP to be functionally unlimited, not as an altruistic gesture, but necessarily to transmit monetary policy to the economy by having rates go up when the Fed says they're going up." They write, "T-bills are another story, as they're the perceived gold standard for safe assets worldwide (using the term loosely, as they're arguably better than gold), and for folks without access to the RRP they're the easy choice for parking short-term money. The pretty solid rate floor the RRP has placed under markets such as the repo and federal funds markets gets spongy when it comes to T-bills, and we particularly see that when T-bill supply is contracting. Looking back a year, total T-bills outstanding had declined about $1.2 trillion during 2021, so the market began 2022 fairly desperately seeking the perceived safe assets it so coveted. In 2022, although supply ended the year just $70 billion lower, it waxed and waned throughout the year and so, too, did investors' prospects and patience." Allspring adds, "During periods of expanding supply, T-bill yields began to approach fair value as determined by the RRP rate adjusted for expected Fed interest rate moves. In contrast, during contractions, T-bills got considerably more expensive than the RRP, which is also an essentially risk-free rate, as it's an obligation of the Fed and is also secured by U.S. Treasury securities. That richness reached a crescendo at the end of the year, when short supply teamed up with year-end window-dressing demand to drive 4-week T-bill yields 69 bps lower than the RRP. To clarify, the 4-week T-bill auction near year-end yielded 3.61% while the RRP rate for the entirety of that T-bill’s existence is expected to be 4.30%. If you have a choice, one perceived safe asset is definitely preferable."
