August 16, 2021
Central Banks Await More Substantial Economic Progress
August 16, 2021
Federal Reserve Board1
The Federal Open Market Committee (FOMC) kept the range for the federal funds rate unchanged at 0.00% to 0.25% at the conclusion of its July meeting, as expected. While messaging remained generally consistent with the prior month’s meeting, the Federal Reserve (Fed) upgraded its stance on the economy, noting that it has “continued to strengthen.” In consideration of preparing for balance sheet tapering, Chairman Powell indicated that the economy has made progress toward the Fed’s employment and inflation goals but data have not been “sufficient” to warrant policy shifts. Current policy continues to be viewed as “appropriate,” and the committee will “continue to assess progress in coming meetings.”
European Central Bank1
At the European Central Bank’s (ECB) policy meeting on July 22, President Lagarde and the policy committee left the ECB deposit rate unchanged at -0.50%, as expected. The committee kept the size of the pandemic emergency purchase program (PEPP) and asset purchase program unchanged in July. While monetary policy was held steady, President Lagarde and the Governing Council tweaked their stance on forward guidance. In what’s being viewed as a more accommodative approach, the ECB plans to keep rates at current or lower levels until “inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term.”
Bank of England1
Although no formal policy meeting was held in July, analysts expect the Bank of England to leave monetary policy and the quantitative easing program unchanged in August. While expectations for policy shifts have been subdued, analysts anticipate the Monetary Policy Committee to portray an optimistic attitude regarding the economy.
Throughout the month, broader market volatility caused by concerns over the spreading delta variant did not flow through to the money market space, with 3-month LIBOR4 rallying to set at an all-time low of 0.11775% on month-end. With a flat curve not compensating investors to extend maturities and take on additional credit and interest rate risk, we remain patient in our investment approach, waiting for dislocations in pricing before putting capital to work. Portfolio WAM (weighted average maturity) and WAL (weighted average life) organically rolled down throughout the month, with weekly liquidity remaining elevated in excess of 50%.
In July, yields remained compressed and the curve flat with most Treasury bill auctions stopping between 0.04% and 0.05%. Extreme amounts of cash in the front end kept the volume rising in the reverse repurchase (RRP) facility, hitting a new high at $1.039 trillion on July 30. In the first half of July, we continued buying 6-month bills then largely ceased purchasing these bills in the latter half of the month, as we felt comfortable with current extensions and portfolio duration profiles. At month-end, the debt ceiling suspension ended, and in August, the government began using extraordinary measures to remain below the debt limit. We remain vigilant of potential Treasury exposures near the debt ceiling “drop-dead date.” Although the date is a moving target, we currently expect it to be in October. Markets are not pricing any debt limit disturbances yet and we hope Congress will address the limit in short order. In the meanwhile, we sold off several Treasury positions and reinvested into overnight repos or other Treasuries given the lack of much yield effect to do so. We continued to invest a significant amount of cash in overnight repurchase agreements and to manage the portfolios to be responsive to changes in market conditions and interest rate levels.
At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) declined during the month of July. The SIFMA Index,6 which measures yields for weekly VRDOs, dropped 0.01% to 0.02%. Yields at the longer end of the municipal money market maturity range dropped as supply remained constrained. The Bloomberg BVAL One-Year Note Index7 finished the month at 0.06%, down 0.08% from the prior month-end. The short-term tax-exempt market is expecting to see continuing strong demand throughout the next month with the support of redemptions and forthcoming August cash.