Reuters: Money Funds Turn Defensive
Last week, Reuters wrote, "US money market funds turn defensive with Fed rate outlook uncertain." The article says, "Money market funds are taking a more cautious approach in their portfolios, reflecting lingering uncertainty about the U.S. Federal Reserve's rate policy path, the latest industry data show. Weighted average maturity -- the average time until securities held by a money market fund mature -- fell to 38 days for the week ending July 10 for the Crane Money Fund Average, a broad industry measure, from 42 days a month ago. The same figure fell to 40 days this month from 44 days in June in the Crane 100 Money Fund Index, which tracks funds holding the vast majority of industry assets." It explains, "Fund managers typically shorten portfolio maturities when they anticipate higher interest rates. Shorter-dated securities mature more quickly, allowing managers to reinvest at higher yields if the Fed raises rates. Locking in three- or six-month Treasury bills ahead of a rate hike can leave investors stuck with lower yields as rates move higher. That caution comes as money market fund assets continue to attract cash. Assets climbed to a record of nearly $8 trillion in the first week of July, according to data from the Investment Company Institute." Reuters adds, "Managers have been deploying some of those inflows into floating-rate notes (FRNs), whose payouts change with the market, unlike typical fixed-rate debt. Treasury FRN holdings rose by $32 billion at the end of June to a record $523 billion.... Funds also increased their use of repurchase agreements, or repos, lending cash to dealers in exchange for securities that the dealers later buy back. As of June 30, repo balances had climbed by $68 billion to $3.06 trillion, representing 37.2% of total fund holdings, according to Crane Data.... [M]oney market funds face a difficult balancing act. 'Money market funds right now are caught between a rock and a hard place,' said [TD Securities'] Gennadiy Goldberg.... 'They want to be shorter in their weighted average maturities because of the risk of Fed rate hikes, but rates at the very front end of the curve, like repos, are still a bit soggy.'"
