Standish Monthly MMF Commentary
Standish Mellon Asset Management posted its "U.S. Money Market Monthly Commentary" for August 2015. It reads, "Barring a significant deterioration in economic prospects, the first Fed increase in almost a decade is likely to occur before year-end. This shift in monetary policy had been anticipated for some time, but until recently had failed to translate into higher money market yields. The market is now on the move. Even 1yr Treasury Bills have broken to the upside (0.36%) despite heightened structural demand for Treasuries.... Prime money market funds continue to prepare for potential outflows, and are keeping liquidity high and maturities short. Overall, the outstanding amount of Commercial Paper has remained stable. In agencies, we continue to see diminished supply from Fannie Mae and Freddie Mac, though this shortfall has been made up by an increase in supply from FHLB. In Medium Term Notes, we note a shift to floating rate coupon for short maturities (18 months and in), while longer maturities are going the other way. While the final outcome of Money Market Reform is still highly uncertain, the path of least resistance appears to be the transition of a significant amount of assets (up to $400 Billion per our estimates) from Prime Money Market Funds to Government Money Market Funds at some point before October 2016. The US Treasury announced plans to increase US Treasury Bill supply to reduce funding risk, though this new supply will be insufficient to absorb all expected new demand. Additionally, political wrangling over the debt ceiling could sharply reduce Treasury bill supply in late November/early December. Another unknown is how banks will react to increased rates in light of higher capital and liquidity requirements. As noted by the 2015 AFP survey, bank deposits have proved an attractive alternative to Money Market Funds for Institutional investors over the past few years. This may change going forward as the rates offered on deposits could lag the Fed target, potentially significantly. All things considered, we continue to expect safe and liquid investments (bank deposits, treasury bills) to become relatively more expensive (e.g., lower yielding) than alternative short-term investments. Even moderate flexibility in maturity and/or credit should provide potential for higher yields.... We continue to see value in 6 to 9 month fixed-rate money market securities, which look attractive on a Fed Funds breakeven basis even under aggressive hike scenarios. We are also adding 2 to 3 year floating rate securities in anticipation of next year’s tightening cycle. We continue to view ABS as attractive, particularly prime Autos."
