Federated Institutional Tax-Free Cash Trust (IS) FFTXX

Share Classes Product Type Asset Class Category
Mutual Fund Money Market Municipal/Tax Free ; Institutional
As of 06-30-2018

The second quarter of 2018 saw the U.S. economy withstand bumps and bruises while maintaining momentum and again receiving the blessing of the Federal Reserve.

After raising the federal funds target range in March, the central bank moved closer to entering a tightening cycle with a hike in June that raised the fed funds rate to a target range of 1.75-2%, while also projecting two more similar size increases to take place in 2018 instead of one. The Fed has characterized rate action since ultra-low levels following the financial crisis as “normalizing” monetary policy. However, the second quarter saw it move closer to a bona-fide “tightening” cycle. This was not just because of the hike, but also because it increased to $30 billion a month the pace of quantitative tapering (QT) to reduce its mammoth balance sheet. Lastly, the Fed made progress on returning to a full complement of governors. It has operated with only three of seven for some time, counting new Chair Jerome Powell. President Trump nominated two more in April, including one for the important vice chair position.

The labor market continued its own tightening over the 3-month period, with the Bureau of Labor Statistics reporting stronger-than-expected employment figures in May: healthy gains of 223,000 jobs and the closely watched unemployment rate declining to 3.8%—matching April 2000 as the lowest level in nearly half a century. Related to this, average hourly earnings ticked up. Inflation percolated but did not boil, remaining below the Fed’s established goal of 2%. However, other economic indicators and sectors improved in the second quarter, led by strong retail sales, robust manufacturing activity and solid gains in the service industry.  

While global political events, including a summit between the U.S. and North Korea, a brewing trade war and a political crisis in Italy, dominated the news cycle, a lesser-known issue worried some investors in cash markets: a growing spread between the 3-month London interbank offered rate (Libor) and the Overnight Index Swap (OIS). But this widening was not due to poor credit of European banks, but rather because of excess bill supply issued by the Treasury Department to fund the government and the Fed’s QT. Both undertakings flooded the market with short-term Treasury bills, pushing rates up.

Over the course of the three months, the 1-month London interbank offered rate (Libor) rose from 1.88% to 2.09% and 3-month Libor rose from 2.31% to 2.34%. The short end of the Treasury yield curve also increased over the quarter, with 1-month and 3-month Treasury yields rising from 1.71% to 1.77% and 1.76% to 1.90%, respectively.

The volatility of the 7-day SIFMA Municipal Swap Index continued into the second quarter and it could be the new norm. This is partly due to higher rates in general but also a tighter supply/demand balance in the tax-exempt money market space. For the second quarter, we had the additional event of individual tax filing deadline, which typically results in outflows. The index climbed to 1.81% in mid-April, then fell to a quarterly low of 1.05% in early-June. This produced supply pressure, which, aided by the Fed tightening, drove the index higher to end the quarter at 1.51%. For similar reasons, the 1-year MIG-1 scale rose to 1.75% in late-April and remained around that level through May. In June, issuance of 1-year notes begin to spike (“summer note season” generally runs from June through August). Surprisingly, this supply was met with strong demand and the scale fell to 1.55% in early-June. Since then, it has backed off slightly and ended the quarter at 1.58%.