Month in Cash: Calm seas are good, but some wind would be nice
Rates continued to remain steady throughout May, with few developments likely in the immediate future that could change that outlook. Overnight repo and federal fund rates have been holding in at the mid-teens, a positive sign, and the Treasury curve remains positively sloped. London interbank offered rates (Libor) have remained virtually unchanged for another month, with three- and six-month steady at 0.47% and 0.74% respectively, and one-year Libor at 1.07%. The Federal Reserve also continues in a holding pattern. Fed Chairman Ben Bernanke and other Federal Open Market Committee members have indicated that we should not expect to see a third round of quantitative easing in our immediate future, but they also won’t rule out additional easing should the situation warrant further action. The domestic economy continues to develop nicely, but without enough growth that we should worry about inflation. Bottom line: The end of low rates is not in sight. Of course, savers and some investors would love to see some positive news on this front, but it’s just more of the same.
On the regulatory front, there has been continued talk about additional regulation of money market funds. But even among Securities and Exchange Commission commissioners, there does not seem to be a consensus as to whether further money fund reform is actually needed. As such, nothing’s been proposed at this point and we don’t really expect anything to come to fruition in the immediate future.
Storm clouds over Europe
Looking overseas, Greece is on a lot of minds right now and getting a good deal of press. The May elections didn’t resolve any issues, and in fact left the country at a political stalemate, with neither the pro-austerity or anti-bailout sides able to form a government. There will be another election in mid-June, where a new government could be formed, or it could just mean reelection of the same players, leading to additional lack of progress. While there’s a lot of “noise” in the marketplace right now over Europe, with this ongoing Greek drama and Moody’s Investors Service’s decision to downgrade the ratings of 16 Spanish and 26 Italian banks, these concerns aren’t directly applicable to money funds. We’ve seen some widening of spreads in the eurozone, but generally, money funds deal in very short instruments, so we’re always in a position to quickly reevaluate exposure to any bank should conditions deteriorate.
In addition, we’ve had a credit barbell strategy in place for some time now. We’ve concentrated the long end of our barbell—12- and 13-month purchases—in the non-European sector, specifically Canadian, Australian, some non-EU Scandinavian and Nordic country investments. Our exposure to EU countries has been concentrated strictly at the short end of the credit barbell, with a focus on banks in the more stable countries such as the UK, France and Germany. There is clearly a storm brewing over the continent, and it may eventually have implications for world economies, but it has little immediate impact on the portfolios, as we’ve already battened down the hatches and secured our sails as much as possible against this particular threat.
