First American PM Commentary
First American Funds published a new money market "Portfolio Manager Commentary." CIO Jim Palmer, Director of MMF Management Jeffrey Plotnik, and Senior PM Mike Welle write, "Due to reforms largely targeting institutional prime funds, the most significant impacts and changes will likely occur in these funds. First American Prime Obligations Fund. During the first part of the quarter, most funds in the prime space started to shorten Weighted Average Life and Weighted Average Maturity in anticipation of a September Fed rate hike and a heightened sensitivity to pricing fluctuations. While investing for the First American Prime Obligations Fund, we utilized breakeven analysis that priced in two rate hikes before the end of the year and were able to capitalize on some yield-enhancing trades. Toward the end of the quarter, front-end yields on credit investments were still relatively attractive despite the lack of a Fed rate hike. While it remained a challenge to add value through liquidity investments (those maturing in one to seven days), investments maturing in April 2016 and before offered attractive opportunities and provided protection against multiple Fed rate increases. With the credit environment stable, investment opportunities arose out of a combination of money market reform, the bank regulatory environment and prospects of a Fed rate hike. We capitalized on these opportunities while keeping investments short of the six- to eight-month range in preparation for potential investor reaction to reform. First American Government Obligations Fund. As government funds expect potential inflows due to money market reform, we had less reservation about buying investment options across the curve. We capitalized on opportunities to purchase floating-rate securities maturing beyond the October 2016 reform implementation deadline to avoid reinvestment risk in a potentially supply-constrained environment. We also took advantage of fixed-rate investment options when economically advantageous.... First American Tax Free Obligations Fund. After trading higher during the second quarter due to seasonal factors, tax-exempt variable-rate demand notes returned to historical lows of just two bps. On average, the SIFMA Municipal Swap Index reset approximately five bps lower quarter-over-quarter.... In the coming quarters, we anticipate seeing yields trend higher in the prime space leading up to money fund reform and a potential Fed rate hike.... With our view the Fed will keep the current target range of 0.0% to 0.25% until first quarter of 2016, we will continue to seek opportunities that arise from market volatility based on economic data, Fed expectations and a shifting short-term market landscape as a result of encroaching money fund reform deadlines."
