Month In Cash: Hurry up and wait
The nation’s sluggish recovery created a waiting game for money markets in February. Mixed economic signals, continued brutal weather and cautious monetary policy kept rates in suspended animation, with all of us waiting for some definitive positive news to move them forward and up.
Jobs remained lackluster, manufacturing slowed and both retail sales and confidence fell in the month. And then there’s housing, which was only marginally better earlier in the month but then launched upward at month’s end. The report, that new home sales posted a 9.6% rise in January to a seasonally adjusted annual rate of 468,000, gave the best number we have seen in five years.
The signs were conflicting in February, but generally leaning toward the slowdown side compared to the fourth quarter of 2013. As we look for sustained good economic reports, we think we need to see March and April data before we can develop a firmer opinion of the economic standpoint in 2014. Will there be a resurgence when the mercury rises, or is growth still going to be lackluster? The verdict is still out and frustration is the only thing thriving.
In an environment like this, no matter what the climate, the Federal Reserve is extremely scrutinized, with analysts, media and investors poring over every report, speech and meeting minutes. Its continuing taper of the amount of bonds it purchases monthly is the most watched activity. It is now down to $65 billion per month, but in the last few days of February new Fed Chair Janet Yellen testified to Congress that the slow economic recovery might cause the Fed to pause its tapering, and two members of the Federal Open Market Committee discussed the possibility of raising short rates sooner rather than later. The last part was music to my ears, but there is still too much noise out there.
We are perhaps more focused on the Fed’s daily maneuvers. The Fed recast its overnight reverse repo facility from a test to an exercise, in place at least through Jan. 2015. It raised the overnight rate from 3 basis points to 5 basis points, slowly creeping up to a little bit less abysmal. The Fed continues to establish its role as the market-rate setter. Counterparties and participants were allowed to use the program up to $5 billion a night, an increase of $2 billion.
Another positive in terms of supply has been the Treasuries. The Feb. 7 debt-ceiling deadline came and went but Congress then extended the ceiling to 2015. While this kicks the can down the road, it is far enough, and it allowed for debt issuance on the Treasury side that was eligible for money funds (including a huge issuance related to extraordinary measures). If all of this leads you to think you should see substantial change in at least the overnight to 3-month section of the yield curve, think again. There actually has been very little movement. The explanation for this is that rates would have probably been closer to zero had the Fed not been in the marketplace.
The end of January saw a floating-rate Treasury note come to the market for the first time. The Treasury offered $15 billion of 2-year floating rate notes resetting weekly off 90-day bills at a spread of 4.5 basis points. We are eager to watch the market develop from the standpoint of both spread and liquidity.
And we continue to wait.