Below, we highlight yet another session from our big Money Fund Symposium conference, which took place 2 weeks ago in Atlanta. (See our June 29 News, "`Highlights of Money Fund Symposium: Invesco's Brignac, Wong Keynote," our July 3 News, "`Highlights of Money Fund Symposium: Invesco's Brignac, Wong Keynote and yesterday's "SEC to Meet/Vote on MF Reforms July 12; Major Issues at MF Symposium.") Today, we quote from the segment, "Senior Portfolio Manager Perspectives," which was moderated by Robert Callagy of Moody's Investors Service and featured Deborah Cunningham of Federated Hermes, Doris Grillo of J.P. Morgan Asset Management and Nafis Smith of Vanguard. (Note: For those that missed the news yesterday, the SEC posted a "Sunshine Act Notice" which says, "The Securities and Exchange Commission will hold an Open Meeting on Wednesday, July 12, 2023 at 10:00 a.m." to "consider whether to adopt amendments to certain rules that govern money market funds." Stay tuned!)
Smith tells MFS, "Supply is still increasing [following the] debt ceiling resolution. We've renewed our buying in Treasuries.... The issuance has been front-loaded, two-months and in, which from a money fund perspective, is kind of the sweet spot. It allows us to ... get some of the cash out of our faces that sort of built up going into the debt ceiling. So [we're moving] a little bit out the curve, but ... subject to valuations. We sort of anchor to what we think the Fed is going to do. I think, like many others, [we'll see] one more rate hike this year, possibly two. You look at valuations, two months and in, and you seem to be, mostly getting compensated for that view. So, we've been comfortable with a toe-dip, if you will, from a Treasury perspective."
He explains, "If you look over the past year or so, however, we've had very little Treasuries in the portfolio. If you go back a couple of years and you look at bill supply kind of from peak to trough, you know, bill supply, has fallen quite a bit and valuations overall have gone down with it. So from our perspective, we had very little Treasuries in the portfolio until recently, which is part of the reason why I guess I'm a little more optimistic than Mark [Cabana of BofA] was from a from a valuation perspective. There's just been this dearth of supply really over the past three years while money market fund assets have steadily increased." [Cabana had urged investors in an earlier session to "Stop!" and "Be patient" when buying Treasuries.]
Smith continues, "If you take a longer view of history, agency supply has also come down. Obviously, it ticked up in March. So I'm a little more optimistic from a valuation perspective on a go-forward basis, at least in the short-term. I'm not anticipating that the market will have significant issues digesting the $1 trillion or so that we're expecting to see between now and yearend. I mean, I guess it's possible that valuations could cheapen a little bit.... [But] when you look at what we're seeing right now, it's hard to envision a scenario where valuations come completely undone."
He comments, "Over the past year, like many in this room, we've had a lot of agency floaters in the portfolios, which in a rate-hiking cycle make a lot of sense for a money fund. With the risk to the upside from a rate perspective, agency floaters still make some sense for some strategies. From an issuance perspective, it feels like things are drying up at this point, and perhaps that's the case for the next few months. But agency floaters still make sense. I don't really see any real risk of valuations becoming undone there in the agency space. Then obviously, like many in this room, [we're putting] a ton of repo into the portfolios. Fed RRP for the better part of a year or more has made a lot of sense, to help us stay short and add value at the same time."
Cunningham then comments, "We definitely think that Treasury supply is the topic of the day. But we also think there are other [ways] Treasury securities and issuance can be absorbed -- not just necessarily in the direct market [but in] repo. The RRP continues to be a pretty good fallback. There are reasons why it's gone from, sort of its peak of $2.3 trillion down to a little under $2 trillion in two days.... But the size of it is still substantial and it's still obviously an important component."
She tells us, "There are some drawbacks to it, though, from a timing perspective. The Fed trade with the RRP is done at 1:00pm. Most funds are open till 5:00pm, so you have four more hours and you can't just depend on that.... We think that the increased Treasury supply from an issuance standpoint [will] help provide collateral for other aspects of the repo market to grow. So traditional tri-party, and additional counterparties taking on additional collateral and providing better rates than the RRP, I think will continue to drive the utilization of RRP from a money fund perspective lower, and ultimately, provide better diversification for the money funds that are investing in them."
Cunningham states, "Nontraditional is another area that we think is also improving from a repo perspective. It seems as though there's a broader willingness for counterparties mostly, and some dealers, to take on not only Treasurys and agencies from a supply perspective, but additional types of nontraditional collateral in order to bring that in an increasing form into the marketplace. [This] again provides better rates than what you're getting from either the RRP or traditional tri-party."
She adds, "Then ultimately, sponsored repo has been really a great innovation over the last several years where new sources of collateral. So ... firms that had not been traditional suppliers or money funds necessarily couldn't deal with ... are now being brought in through `bank sponsors and DTCC. [This gives us] a really improved balance of supply … with rates that are a little bit more favorable. Some of the more standardized legal contracts that are now associated with that business are also likely helping fuel the expansion of that particular product. With over $1 trillion in assets flowing into funds over the last 12 months, [that] has been beneficial, and I think they will continue to grow."
Grillo comments on the credit markets, "In terms of supply year-to-date, we've seen about $406 billion in floating-rate product that's been issued, and year-to-date last year it was $415B. So, definitely, supply has not been an issue.... Last year, there were some supply-demand issue dynamics.... Obviously, it's the same banks, the Canadians are typically ones to issue, ... Scandinavian, Japanese banks.... Most of the supply that has been issued, because of the interest rate cycle that we are in, has been mostly in floating. In fixed, [it's been] typically on the shorter end, FOMC date to FOMC date."
Cunningham adds, "We're still buying floaters. Doris mentioning the supply of floaters has been good. That means spreads have been a little bit wider. There are more variations of them. They're not just issued with one-year finals. ABCP, regular CD products are issuing them with 3-month, 6-month-type finals. That goes along with [the] 'higher for longer' trend, and that's how we're investing as a general strategy for our portfolios at this point. I would say it's very tough to call a peak; we think it's easier to call a plateau. And Mark, we're not jumping, so don't tell me to stop. I would say we're 'waddling' a little bit towards that plateau and staying in the game ... investing in the fixed-rate sector, 6 to 12 months, more strategically in our non-government products than our government products."
She also says, "However, on occasion when there is a bill or a note that gets cheap enough in the government space as well. We also think on the government side some of the more recent issuance, cash management bills certainly provide a nice sort of gap-filling space for some of some of the portfolios. [T]he supply that we've seen in all markets ... has been good for ... keeping a positive trend in the yield curve, so that when we're doing relative value decision-making on a daily basis more options pop up as possibilities that seem to make sense."
Finally, Grillo adds, "We all know that this has been a very challenging cycle to try to manage through. In terms of positioning, I should call Mark a little more frequently and have him yell at me.... For the most part, we remain very defensive, keeping our powder dry, obviously short WAMs, mid-range on the WALs, focusing more on floating-rate product. It was easy during the past year when we knew where the Fed was headed.... Now we are at the pause, hike, whatever.... So currently we think because of the uncertainty around the Fed, it ... encourages us to focus on floaters and ... fixed for the next FOMC." (Note: Conference materials are available in our "Money Fund Symposium 2023 Download Center.")
