First American PMs; Fidelity Q&A
First American Funds released its quarterly money market funds "Portfolio Manager Commentary." Portfolio Managers Jim Palmer, Jeffrey Plotnik, and Mike Welle write, "During the second quarter, the U.S. short-term markets continued to speculate on the timing of the first Fed rate hike since 2006. Investors were generally in agreement with regard to the pace of any target range increases, with the expectation the Fed will opt for a modest and gradual approach.... The objectives of the First American money market funds in this environment were to maintain strong credit quality and incorporate future Fed rate expectations into portfolio investment selections to take advantage of a steepening yield curve. The Fed's Reverse Repo Program (RRP) continued to be a market stabilizing force by setting a floor on overnight inter-dealer repo rates in the five- to eight-bps range. Market consensus is the Fed's repo facility going forward will be instrumental in executing monetary policy, controlling short-term interest rates and providing access to quarter-end liquidity. While the final disposition of the RRP is still to be determined, we anticipate the Fed will continue to test various scenarios regarding the rate, size, auction timing and structure of the program. Ultimately we believe the Fed will expand the program enough to absorb investor demand for short-term instruments." They continue, "As the First American Prime and Tax-Free Obligations Funds prepare for reform implementation, they will be structured to implement strategies that coincide with the timing and expected market impact of reform." First American adds, "In the coming quarters, we anticipate the overall investment environment will be more volatile as the market interprets economic data and speculates on the timing of a Fed rate hike. We expect to see yields trend higher leading up to money fund reform and a Fed rate hike. As global demand for low-risk assets is expected to remain strong, we foresee any upward movement in yields impacting prime funds more significantly than government and Treasury funds. With our view the Fed will keep the current target range of 0.00 to 0.25% until at least September, we will continue seeking to capitalize and extend where opportunities arise from market volatility based on Fed expectations and impacts of money market fund reform." In other news, Fidelity's Head of Fixed Income Nancy Prior answered questions on MMF reform in a Q&A posted on Fidelity's web site earlier this summer. She discusses, among other things, Fidelity's conversion of the $112 billion Fidelity Cash Reserves from Prime to Government, saying, "We clearly heard that many customers want continued access to a money market fund that offers a stable $1 NAV and is not subject to liquidity fees that could be placed on redemptions in certain circumstances, or to gates, which prohibit redemptions in specific situations."
