Month in Cash: Rates steady as recovery shows signs of life
Treasury and repo rates have held fairly firm throughout the month, as we’ve had good supply in both markets. We’ve seen the overnight repo market holding in the mid-to-high teens, and Treasuries have been providing relatively decent returns in the three- to six-month area of the cash-yield curve. Commercial paper has remained steady as well and, despite concerns, corporate earnings for the second quarter came in flat to mildly positive, staying out of negative territory, as might have been feared when the second quarter took a downturn.
London Interbank Offered Rates (Libor) have continued to drift slightly lower this past month. That’s a reflection of a couple of factors. First, some of the credit spreads in the global arena, and in particular the European banks, have gotten a bit thinner, as markets come to accept the idea that these banks do, in fact, have adequate financial backing and liquidity. Second, there’s some market apathy happening here. The European/Greek sovereign-debt crisis has been on the front page for so many months, with each week bringing new predictions that the end is upon us. The world hasn’t imploded, though, as far as we can tell, and markets have come to grips with European risk, and have had time to make preparations for a European meltdown, if that were to happen. Attention in Europe is focused right now on whether German Chancellor Angela Merkel will support European Central Bank President Mario Draghi’s efforts to stabilize markets through a boost in the ECB’s bond-buying capacity. While Merkel is likely, in the end, to fall in line, there’s still no telling what conditions Germany might insist on as a price for its support.
Easing pressure for easing?
Despite all the talk in the markets, we don’t see it likely, without some sort of major market movement, that the Federal Reserve will announce any sort of new easing measures this month. We never thought another round of easing was as imminent as the headlines might have suggested during the dicey summer months, and now that economic data is starting to show some strength again (thank you!), it seems there’s even less justification out there.
Should the Fed decide to go down that path, we continue to see the limited measure of an extension and/or modification of Operation Twist, by either broadening the collateral types or widening maturities, as the likely choice. While there’s always a chance of a full-scale Quantitative Easing III, that’s looking more and more like a distant runner-up as conditions improve. The third option, lowering or eliminating the Interest Rate on Excess Reserves, or IOER, has fallen so far back that it’s not really in the race any more. That’s a good thing, though. The ECB lowered its deposit rate in mid-July from 25 basis points to zero and reduced its lending rate from 1.0% to 0.75%, and things did not go well. The ECB had hoped European banks would have pulled their deposits and moved them over to more productive and lucrative lending, to actual businesses, and spur some growth. The banks didn’t cooperate, though, and now Europe is facing negative rates, zero loan growth, and, to top it off, less profitable banks. The move even had the perverse effect of causing European government money market funds to close to new investments so as to avoid further injury to their existing investors. Bottom line: Don’t look for that kind of action here.