The drama over the debt ceiling is a waste of time and energy.
Concerning the federal debt limit, our lawmakers have created a variation on Murphy’s Law: There’s no reason we should be dealing with this, so therefore we are.
One of the more routine processes Congress makes has become politicized again. After a deal to suspend the debt ceiling failed earlier in the week, investors, financial institutions, investment managers and the Treasury have realized they will have to be the adults in the room. But even if this drama continues for a few more weeks, we can’t emphasize enough there is only an extremely low chance the U.S. government will default. We fully expect there to be no change in the vast Treasury market and are confident the liquidity it provides—an integral part of the money markets—will remain intact.
Our confidence is bolstered by how the Federal Reserve has prepared for any dislocations in short-term borrowing by doubling the counterparty limit available in the Reverse Repo Program (RRP). It now stands at $160 billion per participant—a huge increase. In spring, the total of all transactions was below $100 billion. Also, the White House has increased its pressure. Treasury Secretary Janet Yellen took the role of a perturbed librarian by sending the equivalent of an overdue book notice to Capitol Hill: You have until Oct. 18 to avoid massive fines! Most cash managers, including us, are increasing liquidity and adjusting the duration composition of portfolios to maneuver around that date. This is not our first rodeo. We know this bull will be lassoed whenever the clowns finally exit the ring.
Moving on, and across the National Mall, to the Fed building…
The Fed was in the news for two different issues in September. The first was its Federal Open Market Committee meeting, with a result doubly positive. Half of the entire group of policymakers (18—at the time) projected the committee would raise the fed funds rate in late 2022, a few months earlier than prior estimates. Chair Powell also gave strong indication they would authorize a reduction in the $120 billion per month asset purchase program in November. To be sure, these are incremental steps, but they further establish the trend that started quietly in June when the Fed raised the floor of the RRP. Money market yields are on an upward path and we expect the yield curve to steepen when the Treasury can issue new debt and as the economy heals further.
Powell had to deal with an unpleasant situation later in the month when two regional presidents resigned on the same day—an astonishing development for an institution that prides itself on stability and high ethics. Eric Rosengren (Boston) and Robert Kaplan (Dallas) both made significant trades last year while involved in decisions about the Fed’s interventions in the market. These go into the “What were they thinking” bucket, even though the moves weren’t technically illegal.
I doubt most cash managers will be sad to see Rosengren leave. His criticism of prime and municipal money funds struck us as stubborn in the face of facts, as he blamed them for the March 2020 events when the entire liquidity market was being challenged. The departures leave three openings (the other being on the board of governors). With all the uncertainty, we saw no reason to alter the weighted average maturity (WAM) ranges of our liquidity funds, leaving them at 35-45 days for government and 40-50 days for prime and municipal.