Money markets still doing the 'twist'

What’s your outlook for money markets?
We see very little change in money market rates for the remainder of 2012. It seems as though when you break it down by types of securities for repo we’ve been averaging in the mid to high teens and we would expect that to go forward in a similar fashion. The Fed’s continuation of Operation Twist, where they’re putting shorter dated securities back into the marketplace that money market funds can purchase, has been helpful. We also think treasury securities will remain in the eight to thirteen basis point range where they’ve been in the 2012 timeframe so far. Libor rates we think will be about 80 basis points steep on a curve basis. That affects our commercial paper and our CD rates within the portfolios and we don’t see those changing too much. On a positive side of the equation, something that would impact rates to go higher, would probably be some form of improved growth in the US. For example, economic improvement that’s not currently expected in the yield curve. On the negative side, something that would impact rates to go lower, would be some sort of a shock from a credit market’s perspective, that again would not be anticipated. We don’t think either one of those things is the likely scenario, so I’ll go back to what I said originally, which is 2012 rates for the remainder of the year will probably stay very similar to where they are today.  

How might the Fed’s extension of Operation Twist impact money markets?
We think it’s a positive in the context of short term rates. Effectively what Operation Twist is designed to do is to take short data treasury securities that could be available for purchase by money market funds out of the balance sheet of the Fed, and put them back into the direct market. So we as money market providers then can purchase them into our portfolios. So it’s a simple equation of supply and demand, there is an increase amount of supply being put into the marketplace by the Federal Reserve, and then the continuing amount of supply that’s being issued by the Treasury, with the same amount of demand coming from basically the industry and other short term buyers. So this effectively puts some kind of a floor on how low short term treasury rates will go with this increase in supply. And because of that it’s been a beneficial response from a yield perspective for our portfolios that buy treasury securities.