In the most recent "Month in Cash" publication, Federated Investors' CIO for Taxable Money Markets Deborah Cunningham writes that the "New Year should, eventually, bring better yields." She gives an update on the recent brief negative Treasury yield reprise, and holds out hope that while the Federal funds target rate should remain flat for some time, rates may begin inching upward due towards the higher end of its zero to 25 bps range.
Cunningham says, "With monetary policy in a prolonged holding pattern, the cash market in December was impacted mostly by seasonal forces that exerted downward pressure on yields at the extreme short end of the cash-yield curve. Though this phenomenon also is observed at quarter end, it is usually more pronounced as the New Year approaches. In the context of a rock-bottom interest rate environment, those seasonal factors -- caused by institutional window dressing and year-end corporate financing needs -- pushed overnight yields on commercial paper and Treasury securities to zero or below."
She continues, "If investors thought they saw the first light of higher benchmark interest rates over the horizon, it was not because of any Federal Reserve pronouncement. The official statement accompanying the mid-December Federal Open Market Committee (FOMC) meeting repeated -- at considerable length -- what the market already knew about the pending withdrawal of various liquidity programs. The Fed did conduct a pair of successful tests of reverse repo transactions in a tri-party arrangement with its traditional counterparts in the primary dealer market."
The Month in Cash also says, "On Christmas Eve, the Treasury Department announced that the government would remove the $200 billion limit on capital support that had been in place for Fannie Mae and Freddie Mac. Implicit in the move was the expectation that those agencies will have additional losses and that Uncle Sam remains ready to finance the mounting red ink. The timing of the Treasury announcement was designed to eliminate the need for Congressional authority to raise the $200 billion credit line for both Fannie and Freddie."
Finally, Cunningham says, "Looking ahead, we continue to believe that the Fed will not raise interest rates until at least this summer. However, there are steps that the Fed can take in the meantime -- such as a broader application of the reverse repo process -- that will at least move the actual fed funds rate closer to the upper end of its zero to 25 basis point target range. On balance, we are guardedly optimistic that the unfriendly environment for savers that has prevailed for over a year will gradually become more hospitable as the New Year unfolds."
