Federated Investors most recent "Month in Cash is entitled, "Overnight accommodations at low rates." Global Money Market CIO Deborah Cunningham writes, "Repo and overnight markets spent much of the last month mired in low territory, at rates not seen for close to two years. These shortest-term instruments were financing, at times, at just 2 to 3 basis points, and expectations were that rates would remain low in the face of continued downward pressures on market supply. Bill issuance dipped late in the month as the Treasury prepared for the reinstallation of the debt ceiling, and although issuance then returned to previous levels, it was not enough -- rates were expected to push up only into the high single digits. This low-rate environment for repos and overnights is likely to continue until there is some more relief on the supply front."
She explains, "That relief might be temporary -- Fannie Mae and Freddie Mac are both in the black now that the housing market is making such a strong showing. As a result, the Treasury will soon be receiving $59.4 billion in dividends from Fannie Mae, and then $7 billion from Freddie Mac, and with that influx of cash the Treasury will have less need for financing from the markets. The ongoing sequestration plays a role, as well. While it has not had the impact on the recovery that had been feared, until it is resolved it continues to hang like a cloud over the prospects for growth for the rest of the year."
Cunningham adds, "The most recent appearance of Federal Reserve Chairman Ben Bernanke and the release of minutes from the previous month's Federal Open Market Committee (FOMC) meeting revealed the beginnings of Fed discussions on how and when to scale back its monthly quantitative-easing purchases of $85 billion of Treasury bonds and agency mortgage-backed securities. In his prepared testimony before Congress late in the month, Bernanke pointedly avoided details on the timing of any unwinding of QE, even reiterating the FOMC still had the option of increasing measures if warranted. However, in the question-and-answer session that followed, Bernanke admitted the Fed might in fact start tapering purchases in its "next few meetings.""
In other news, Fitch Ratings distributed a press release entitled, "Fitch: Corporate Cash Managers' Fresh Look at Structured Finance," which tells us, "Persistently low yields have led corporate cash managers and corporate treasury consultants to think more creatively about how to achieve higher returns without taking excessive risk and maintaining appropriate liquidity, according to Fitch Ratings."
Fitch explains, "Cash managers seek safety of principal and liquidity while optimizing yield to the extent possible. Increasingly, this involves dividing a corporation's liquidity needs into several 'buckets' based on when the cash is needed and the accuracy of their cash forecasting process. This more focused analysis of liquidity needs has led some cash managers to invest a portion of their companies' cash for longer time horizons in order to maximize yield."
The release says, "In certain cases, cash may be held for longer term strategic reasons and, therefore, may be invested in longer dated high quality securities offering higher yields than money market funds, demand deposits, or other short-term instruments. We understand that highly rated structured finance (SF) securities are increasingly being considered as part of this shift."
Finally, Fitch adds, "We have seen a growing interest in the money market tranches of SF securities on the part of corporate cash managers. These securities, which showed steady performance during the financial crisis, are designed to be 2a-7 eligible investments for money market funds with final legal maturities of 397 days or less. Approximately 95% of the structures that match assets to liabilities, rather than rely on third-party liquidity, have paid in full and the balances affirmed at 'F1+' by Fitch. This is the predominant structure in the U.S. market today."
