Month in Cash: Easing has to end sometime
Despite somewhat weaker economic releases in March and the early part of April, first quarter 2013 Gross Domestic Product (GDP) came in at 2.5%, a step up from fourth quarter 2012’s anemic 0.4% increase. While GDP may have missed estimates, which had been expecting 3.0% growth, and there have been fits and starts in this recovery, key sectors such as employment and housing seem to be on positive paths, and the recovery as a whole is on fairly firm footing. While nothing immediate is expected, if these trends continue the improving economic picture is likely to spark some modification to the Federal Reserve’s monthly purchases of $85 billion in longer-term Treasury and agency mortgage-backed securities.
It’s too early to tell how the modification might be configured, and whether it would involve cutting back on reinvestments of payments, or even which sectors might be targeted. It’s also unlikely any changes will come before the second half of 2013. Once modifications to QE begin, however, the yield curve is expected to steepen and purchases out in the six- to 12-month range should begin to look more attractive. Certainly, the Fed is not likely to move the 0% to 0.25% federal funds target rate until well into 2014, but the adjustments to QE will have some effect on the yield curve. We believe the sentiment that this low-rate environment will go on into infinity seems to be somewhat overdone. As a result, Federated’s money funds have been slightly shorter in weighted average maturity, on a barbell basis, than they had been previously, with some additional concentration in floating-rate securities in order to be in a more responsive position when the steepening of the yield curve does start to happen.
While the asset-backed commercial paper sector has not yet begun to grow, it’s no longer shrinking, as it had been for the past few years, and that’s a good thing. The underlying receivables have been doing very well, with auto loans and credit cards performing with minimal loss. We’ve seen more issuers and a higher volume. The spread in the asset-backed commercial paper market has dwindled, and is not as attractive as it once was, but it’s still an active marketplace, and is expected to grow in the second half of 2013 as the economy continues to improve.
Overnight repurchase agreement (repo) rates had hovered in the upper end of the 0% to 0.25% target range, at around 22-23 basis points, throughout the second half of 2012. In the first quarter of 2013, however, repo rates dipped lower, in the 14-16 basis-point range. There was then some further softening toward the end of April, down to 5-7 basis points in few instances, before rates bounced back up into the mid-teens again. Repo rates are likely to stay in that mid-teen range for the remainder of the second quarter. As a result, we have positioned funds to have less exposure to overnight repos than has historically been the case.
Congressional standoff continues
Dysfunctionality remains well in force in Washington, and the battling factions are heading toward another showdown on May 19, when the Congressional suspension of the nation’s borrowing limit is due to run out. With little more than two weeks to go before the deadline, there is little, if any, talk of a compromise solution, and more troubling, little concern on Capitol Hill that we’re this close without any substantive discussion taking place. The sequester cuts first enacted on March 1 continue on course without a fix in sight. We’ve seen some public pressure come to bear on Congress from airport delays related to cutbacks in air traffic controllers, but little else has made headlines, despite the negative effects federal spending cutbacks seem to be having on the recovery. From a money market standpoint, in terms of short-term rates and supply, there has not been much impact—yet.