May 17, 2021
Economic Data Improves, but Central Banks Still See Risks
May 17, 2021
Federal Reserve Board1
As expected, 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 April meeting. While the Federal Reserve (Fed) maintained its steadfast accommodative monetary policy, it noted changes to the economy, progress on vaccinations, and risks to the outlook. For the first time, the Fed commented on the vaccine rollout and strong fiscal policy that have helped “strengthen” the economy. More specifically, the Fed said, “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.” The Fed removed “considerable” when describing risks to the economy, saying, “the ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.” Looking ahead, Chairman Jerome Powell strongly reiterated the Federal Reserve’s forward guidance on quantitative easing policy and view on rates, as they still consider the economy a long way from the Fed’s goals.
European Central Bank1
At the European Central Bank’s (ECB) policy meeting on April 22, 2021, President Lagarde and the policy committee left the ECB deposit rate unchanged at -0.50%, as expected. The committee kept the size of its pandemic emergency purchase program (PEPP) and asset purchase program unchanged in April. Similar to its March statement, the Governing Council plans to conduct purchases under its PEPP at a “significantly higher pace than during the first months of the year.” While the environment remains uncertain, the ECB views current policy as appropriate and will remain accommodative until inflation moves towards its mandate.
Bank of England1
Although no formal policy meeting was held in April, analysts expect the Bank of England (BOE) to leave policy unchanged in May. While national lockdowns will have an impact on economic data, analysts believe it will be less adverse than originally expected. Investors will want to pay attention to the BOE’s guidance on economic activity and how the vaccine rollout are affecting the economy.
With cash remaining abundant on the short end of the curve, spreads stayed tight and LIBOR4 once again hit new all-time lows intra-month of 0.17288% on April 21. We maintained our strategy of adding fixed-rate investments to the portfolio, due to the liquidity and roll-down benefits of that structure. Weekly liquidity in our portfolios remain elevated, in excess of 50% throughout the month.
Yields on overnight repurchase agreements remained extremely low with SOFR5 printing at 1 basis point each day in April. Short maturity Treasury yields remained in the single digits across the curve, with 1-month through 1-year bill auctions stopping between zero and 0.065%. Cash inflows into money market funds continued in April, as did net Treasury bill pay-downs, both of which weighed on front-end yields. Not surprisingly, volume in the reverse repurchase (RRP) facility steadily increased to a peak of roughly $183 billion at month-end. We selectively bought Treasuries for the portfolios and invested a large portion in short-term repurchase agreements. We continued to ensure high levels of liquidity and 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) were unchanged throughout the month of April. The SIFMA Index,7 which measures yields for weekly VRDOs, held steady at 0.06% during the month. Yields at the longer end of the municipal money market maturity range trended lower as supply remained constrained. The Bloomberg BVAL One-Year Note Index8 finished the month at 0.08%, down 0.02% from the prior month-end. With inventory levels remaining manageable and an influx of coupon cash, we expect rates to remain in this range, even as we approach the delayed personal income tax filing date of May 17.
Government and Treasury Funds are Stable NAV funds.