Allspring Money Market Funds published its latest "Overview, Strategy, and Outlook" last week. The section on the "U.S. government sector," written by Senior Portfolio Manager Michael Bird (who will speak on "Government Money Fund & Repo Issues" at our upcoming Money Fund Symposium in Minneapolis, June 20-22), tells us, "In the markets for government securities, little has changed in the past month. The Fed continues to look poised to remove accommodation rapidly, with an interest rate hike of 50 bps and a quantitative tightening (QT) announcement both expected at its early May meeting. The Fed is reacting to economic data that has uniformly pointed to a strong labor market and rapidly rising prices and is expected by the government markets to continue raising rates expeditiously throughout the year." It continues, "Also among the little changed from last month is the stark imbalance between supply and demand in the money markets. The Fed's reverse repurchase program (RRP), a home for wayward cash, took in an average of $1.769 trillion with no other investment options every day in April. In addition, the Fed's Secured Overnight Financing Rate (SOFR), a broad measure of overnight repurchase agreement (repo) rates, set below the RRP rate of 0.30%, the Fed's intended repo floor, routinely in April, reflecting repo activity by investors not eligible to participate in the RRP. Treasury bills (T-bills) also trade at yields that are very low compared with the Fed's expected rate path. For example, the T-bill maturing in one month yields about 0.35%, in comparison to the RRP, which will likely yield 0.80% for nearly the entire month." Allspring's update says, "The cause of today's monetary imbalance was the Fed's money-printing quantitative easing during the pandemic, and QT will eventually be the solution, but it will take a while. The Fed is expected to announce that it will begin to allow its balance sheet to shrink in the second quarter of 2022, gradually drawing down excess liquidity by letting its securities holdings mature without being reinvested. After perhaps several years, the excess liquidity will have evaporated, the RRP will lie dormant, and market activity will set rates. However, for the very near term, and until that day comes, we can continue to see government securities trade at richer levels than the Fed's glide path would indicate."

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