State Street IM: Patience Pays Again
State Street Investment Management (SSIM) recently posted a "Monthly Cash Review" titled, "Patience pays again." They write, "June was supposed to be a straightforward month for cash investors. The Federal Reserve was expected to sit still, money markets were behaving themselves, and summer was approaching. Naturally, markets looked at these perfectly reasonable expectations and decided to do something entirely different." The brief continues, "The month's main event was the first FOMC meeting chaired by Kevin Warsh. The Fed left rates unchanged at 3.50–3.75%, exactly as everyone expected. In fact, expectations were so unanimous that a surprise would probably have caused several trading desks to collectively throw their spreadsheets out the window. Instead, Chair Warsh chose a different form of entertainment. He dramatically shortened the Fed statement, reduced forward guidance, announced a series of task forces reviewing everything from communication strategy to the balance sheet, and effectively told markets, 'You'll just have to watch the data and figure it out yourselves.'" SSIM says, "Fortunately, cash investors had little reason to complain. Treasury bill yields moved to some of the most attractive levels seen in months. Three-month bills traded above 3.70% while six-month bills pushed above 3.90%. Investors responded by purchasing bills while simultaneously worrying that rates could move even higher. Credit markets were similar; opportunities were there but care was warranted. Markets can reprice fast and leave you with renewed risk. This is a time-honored tradition in the cash markets: finding an attractive yield and immediately becoming concerned that you're not getting enough of it." The piece adds, "Money market funds also enjoyed another exceptional month. Assets climbed to a record near $7.9 trillion as investors continued parking cash in what has become one of the most popular trades on Wall Street: getting paid to be patient. Institutional investors alone added roughly $100 billion in a single week. After years of earning close to nothing on cash, investors remain surprisingly enthusiastic about earning something.... As June closes, the outlook for cash investors remains remarkably attractive. Yields are compelling, liquidity is plentiful, and funding markets remain stable. The future path of monetary policy may be less certain than it was a month ago, but money market investors are currently being paid handsomely to wait for the answer. In a world filled with geopolitical drama, policy uncertainty, and endless forecasting mistakes, earning nearly 4% while remaining liquid may be the closest thing markets offer to a free lunch. And unlike most free lunches, this one actually pays you."
