Month in Cash: Alphabet soup

05-01-2018

Get ready for some acronyms: SOFR, OBFR, OIS, FOMC, QT and MIC. Well, the last is our internal abbreviation for Month in Cash. But the others have significance for cash managers everywhere, with the big message being, they are nothing to worry about.

First is the Federal Open Market Committee (FOMC), which gained some ground in April from a membership perspective. The Fed has had only three of seven governors for some time now, counting new Chair Jerome Powell. But President Trump nominated Richard Clarida as vice chair and Michelle Bowman as the governor representing community banks.  While it is unlikely the Senate will confirm floundering nominee Marvin Goodfriend, the expectation is that the other two will be approved, possibly in time for the June FOMC meeting. June is likely to produce the next rate hike; expectations for this week’s policy-setting meeting are for no move.

Clarida, a scholar in monetary policy, leans hawkish, while less is known about Bowman's stance. The profile of the Fed is probably not going to be that different in the end. With inflation slowly picking up, even the doves are getting somewhat hawkish. By the way, the transfer of John Williams from the San Francisco Fed to the New York Fed does not need Senate confirmation. Of course, the Fed must fill the vacancy created.

Second, the large spread between the 3-month London interbank offered rate (Libor) and the Overnight Index Swap (OIS) continues to get a lot of press, but the story remains a benign one. The widening is not due to any bad credit of European banks, but with the excess Treasury supply and repatriation of overseas cash. The excess bill supply issued by the Treasury Department and the Fed’s quantitative taper (QT, now $30 billon-a-month) has flooded the market with short-term Treasuries, pushing rates up. Nothing to worry about.

Lastly, another issue that should not be a concern is the Secured Overnight Financing Rate (SOFR), proposed by the Fed’s Alternative Reference Rates Committee (ARRC) to replace Libor. It might someday, but as of now it is a risk-free rate (collateralized by Treasuries) and not a credit rate. Another possibility is the Overnight Bank Funding Rate (OBFR). For your own health, let this all play out on its own; they have until 2021 to figure it out.

One more thing. With the 3% 10-year Treasury getting attention, remember that comes with a loss in net asset value (NAV) for products in that area. Money market products, however, earned close to 2% in April and likely will cross that threshold without any deterioration in principal in the very near future if the Fed continues on its path. Cash is an asset class again, not just a liquidity provision.

The target weighted average maturity (WAM) of our funds—government, municipal and prime—remained at 30-40 days last month, averaging in the low-to-middle part of that range. We continued to purchase Treasuries because of the spike in yields due to the aforementioned glut of supply. Libor rose over the month as it anticipates June rate action. One-month Libor increased from 1.88% to 1.91; 3-month from 2.31% to 2.36%; and 6-month from 2.45% to 2.52%.