Fidelity on Higher Rates, Prime
Fidelity Investments writes "Rates Expected to Gradually Move Higher in 2017." It explains, "For a data-dependent Federal Reserve (Fed), first quarter economic reports, primarily related to the labor markets and inflation, provided the basis for a second rate hike in three months. Prominent Fed officials, including Chair Yellen and New York Fed President William Dudley, had telegraphed the intention to raise rates during multiple speeches leading up to the meeting. And indeed, the Fed raised the target range for the federal funds rate from 0.75% to 1.00% in mid-March." Authors Michael Morin and Kerry Pope explain, "While year over year the overall level of money market fund assets remained stable, the influence of 2016 money market fund reform and the significant movement of money market assets from prime funds into institutional government funds continued to be evident in the first quarter. The average spread between institutional prime and government money market funds grew to 34 basis points (bps) by March 28.... The widening of spreads contributed to an increase in prime assets of approximately $22 billion, to $396 billion. While the increase is below industry estimates, there are several factors contributing to the very slow return of assets. Floating NAVs and the potential for gates and fees require additional operational, tax, and liquidity considerations for many institutional investors. Given the list of priorities for corporate treasurers, it may take a tax holiday or another U.S. debt-ceiling crisis before prime money market funds and conservative, ultra-short bond funds make it to the top of the priority list.... As the Fed continues to raise rates, prime money market fund spreads to government money market funds and bank products could continue to widen. In a total-rate-of-return environment, prime money market funds may represent value to those institutional investors that maintain strategic liquidity above and beyond their operating cash balances."
