Federated Institutional Tax-Free Cash Trust (PRM) FTFXX

Share Classes Product Type Asset Class Category
Mutual Fund Liquidity Municipal/Tax Free ; Institutional
As of 09-30-2018

In its June policy-setting meeting, the Federal Reserve laid out a relatively straight path to a September rate hike, which came to pass with a quarter-point increase in the target range to 2-2.25%. But there was a slight bump, as President Trump publicly criticized the central bank for raising rates because of their potential to stem economic growth. This represented a break from precedent, as one of the Fed’s defining characteristics is that it operates independently of the rest of the U.S. government. Most politicians don’t talk about the Fed much, let alone tell it what to do. Chair Jerome Powell addressed this by stating in September that the central bank does not consider political elements when setting policy. September’s rate hike was not the only policy tool the Fed implemented during the reporting period, as it continued to expand its quantitative-tapering (QT) plan that allows maturing Treasuries and government agency securities to roll off its massive balance sheet. The resulting increase in supply in the marketplace has nudged rates further higher, particularly as the amount of maturing securities not reinvested has grown from an initial $30 billion in the fourth quarter of 2017 to $120 billion.

On the macro level, the housing market continued to soften, as supply decreased and mortgage rates edged up. But most economic indicators were solid, if not robust: job growth, consumer confidence, retail sales, manufacturing and service activity and capital expenditures all hit or were near cycle and in some cases multi-decade highs during the three-month periods as  gross domestic product accelerated even as inflation remained moderate and manageable. The quarter saw intensification of tariffs by the Trump administration on China, and responses in kind. But while edging ever closer to a full-blown trade war and facing opposition from select U.S. industries, the duties did not result in meaningful headwinds for the domestic economy. A trade deal with Mexico suggested that at the end of the day, a transactional Trump wants deals, not conflict. Although the trade skirmishes began to affect the global economy, greater impact was felt by the strength of the U.S. dollar, particularly in the emerging markets. But the most prominent trouble areas, such as Turkey, Argentina and Indonesia, faced idiosyncratic struggles, suggesting a contagion was not in the works.

Year-long volatility in the 7-day SIFMA Municipal Swap Index finally abated in August. The exceptional fluctuation can be seen from both the large drop from a high of 1.81% in mid-April to a low of 0.94% in late July, as well as significant week-to-week movement. This volatility was a catalyst for tax-free money market fund outflows. In mid-August, however, the index stabilized, ranging between 1.45% and 1.58% and ending the quarter at 1.56%. This led to positive flows into tax-free money market funds. The Fed rate hike likely will put upward pressure on the Index as we enter the fourth quarter. 1-year note issuance had significantly lagged behind 2017 figures until the late-August sale of $7.2 billion by the state of Texas. This, along with the general increase in interest rates, pushed the 1-year MIG-1 scale from 1.58% to the current 1.95%.

Over the course of the three months, the 1-month London interbank offered rate (Libor) rose from 2.09% to 2.26% and 3-month Libor rose from 2.34% to 2.40%. The short end of the Treasury yield curve also increased over the quarter, with 1-month and 3-month Treasury yields rising from 1.77% to 2.08% and 1.90% to 2.18%, respectively.