Short on days, February was long on anxiety for some.
Outdoor enthusiasts, chocolatiers and florists aside, most would like February to end even sooner than it does. Snow isn’t quaint anymore and most of us are stir crazy. This year, it manifested in the financial world through handwringing over issues that can’t immediately be resolved.
First is inflation. For several months, we have taken the contrarian position that an uptick is possible. Anyone who doubts the power of pent-up demand combined with cash in hand need only look at the blowout retail sales figure in January. But it is a matter of gradations. The recent cries that inflation will skyrocket are unfounded. Federal Reserve Chair Powell threw cold water on the concern in his testimony to Congress last week, reiterating that the economy is a long way from the Fed’s employment and inflation goals. Our view is that a slow and steady rise in prices could lead the Fed to move its first hike to next year instead of 2023.
Another hot button is the potential for new regulations to address the turmoil of last March. But changes are not going to happen overnight—and actually might benefit the money markets. The President's Working Group on Financial Markets threw a wide net when making its list of “options,” and most won’t make the first cut. It is possible regulators will uncouple the link between liquidity thresholds and fees/gates, which would be an improvement benefitting all. We will continue to work with the Investment Company Institute and other industry leaders to fight the misguided narrative that continues to pin the blame on money market funds when the stress was widespread.
Negative rates? Well, the Bank of England yanked the issue into the spotlight again when it told U.K. banks they have six months to prepare their systems to handle them. British policymakers followed that by saying this new mandate didn’t mean they had decided to drop rates below zero. But by that point, the markets and press were already fretting. Fact is, the main central banks are no longer clandestine institutions. They want the markets to take them at face value. We believe the Fed when it says negative rates are not on the table. If policymakers change their mind, we will hear about it long before.
The hope is we will be reading about the completed passage of the next fiscal stimulus package soon. As it likely will be financed in part through additional supply of Treasury bills, we expect this to ease the supply strains at the front end of the yield curve.
February did see an actual development in the liquidity space. The new Bloomberg Short-Term Bank Yield Index (BSBY) is tracking the London interbank offered rate (Libor) and Secured Overnight Financing Rate (SOFR) well, and the volume of transactions it incorporates is growing. It is only a matter of time until a security based on it comes to market, and that should establish it as the appropriate index for the prime sector.
Industry-wide, flows in the government money market space were flat over February, while those for prime and tax-free slipped modestly. We kept the weighted average maturities of our money funds in target ranges of 35-45 days for government and 40-50 days for prime and municipal.