It is hard to live in the present in general, but that is particularly true in business and finance as so much is predicated on what comes next. Whether it is the big ‘E’ in the equation for determining future value or the lower-case ‘e’ of the word itself, expectations rule.
But in the case of liquidity products, the ‘here and now’ is attractive and the ‘near and future’ looks good, too. The US Federal Reserve will eventually lower rates, but based on the March Federal Open Market Committee (FOMC) meeting, that is down the road. While the new Summary of Economic Projections (SEP) calls for three quarter-point cuts this year, we think the first will not arrive until July, and it is possible the June SEP will indicate just two. Inflation’s recent back-up reminds us that the last mile is the hardest. Retail sales show the economy is steady and the labour market remains robust. Having reeled in market hopes for aggressive easing, the Fed might need to hold the line taut to keep them hooked.
In the case of liquidity products, the ‘here and now’ is attractive and the ‘near and future’ looks good, too.
The situation means this remarkable period in cash management history could stretch for many more months, keeping yields attractive and assets growing. Supply of US Treasuries might be a little tighter in the second quarter as the US Treasury receives tax payments, but that should not have a material impact. Speaking of taxes, the tax-adjusted value of municipal money funds across the industry for those in the top tax brackets is compelling, and the Securities Industry and Financial Markets Association (SIFMA) has been less volatile of late.
One more time, for good measure
A final reminder that the next compliance stage of the new US Securities and Exchange Commission (SEC) money market rules arrives at the start of April. Money funds must maintain at least 25% in daily liquid assets (previously 10%) and at least 50% in weekly liquid assets (previously 30%). Tax-exempt money funds are not subject to the daily requirement.
Liquidity at large
The era of paying banks to hold cash has ended as the Bank of Japan (BoJ) hiked rates last month for the first time in 17 years. That action pushed its main rate out of negative territory, from -0.1 to a range of between 0% and 0.1%. But lest savers in Japan get too ecstatic, such a modest move means BoJ policy remains very accommodative, especially because officials did not outline a path of additional hikes. In the other direction, the Swiss National Bank became the first developed-market central bank to cut its main interest rate, which it did by a quarter-point to 1.5%.
The rest of the world’s major monetary policymakers followed the Fed in holding benchmark rates steady and signalling easing is on the horizon. The European Central Bank kept its deposit target at 4%, yet signalled it could potentially start easing at its June meeting. Bigger news came with its announcement it will shrink its bond portfolio, lending more to banks to offset liquidity concerns. The Bank of England held rates at 5.25%, though Governor Andrew Bailey said inflation is “moving in the right direction”. The Bank of Canada left its benchmark rate at 5%, signalling it is premature to consider cuts despite improvements in inflation and wage growth. Lastly, the Reserve Bank of Australia held policy rates at a 12-year high of 4.35%.
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