In April, the Federal Reserve (the Fed) flooded the US markets with an unlimited amount of liquidity and the US Treasury flooded the market with capital support. Overall their program count is at 14, both monetary and fiscal, with many programs being expanded beyond their original scope. And as the saying goes: perception is reality. The risk markets recovered, if not improved, even with catastrophic economic headlines including: a record number of jobless claims, a huge loss in payrolls, a spike in the unemployment rate, a decline in labor force participation, and dramatic drops in ISM, retail sales, housing starts, building permits, GDP and Personal Consumption. It seemed the only thing that mattered was how much liquidity and support was being injected into the financial system. And for that there was a blank check, or so it seemed.
April will go down as having one of the strongest risk rallies in memory. US equities were upbetween 11% and 15% depending on the index. Investment grade corporate bonds outperformedTreasuries by 4.5% while high yield bested Treasuries by 3.8%. A record $199 billion of corporatedebt was issued, aiding in the improvement of liquidity in a broad range of sectors, as wellas overall market tone as issuance is continually utilized to build balance sheet flexibility forcorporations. Cash and money markets were no different. Commercial paper markets wereactive and we saw an extension in maturities as yields declined, reflecting renewed confidence.Top-rated commercial paper yields declined by about 100 basis points (bps) over the month,ending at a spread of 59bps over comparable US Treasury bills. The yield difference betweenLibor and OIS (also known as LOIS) in three months compressed from 136bps to just 50bps.The difference in spread at the end of February was just 23bps so there is still room to improve.Longer term floaters also improved. The Bloomberg Barclays 18-month floating rate Indexdeclined by 77bps. Fortunately, (however unfortunately for our investors) prime moneymarket fund yields also declined over the month. On average, Prime money market fund yieldsdeclined by 31bps (from 94bps to 63bps) while Government money market funds declinedby just 12bps (from 31bps to 19bps). Sadly, by the time this piece goes to print, we suspect theyields will be even lower.
As mentioned earlier, perception is reality, but what is the reality in this case? The Fed’s balancesheet and the US Treasury’s debt issuance are both good gages to reference. The Fed’s balancesheet is $6.6 trillion as of May 3, +$843 billion from a month ago, +$2.5 trillion from three monthsago and +$2.7 trillion from a year ago. The Treasury portfolio post-quantitative easing measuresis currently $3.9 trillion, +$630 billion from one month ago, +$1.5 trillion from three months ago,+$1.8 trillion from a year ago. The Fed’s loans at the discount window have fallen to $31 billionfrom $43 billion a month ago. The Primary dealer credit facility has fallen to $25 billion from$33 billon and the money market Liquidity Facility is down $46 billion from $52 billion a monthago. The Fed’s US dollar swap line has risen to $438 billion, up $90 billion from a month ago.Besides quantitative easing, the US dollar swap line seems to be the most valuable tool in the Fed’s tool box based on utilization. We are still waiting on other programs to get up and running.The US Treasury continues with its breakneck speed of issuing debt. As of month end we haveover $900 billion of cash management bills issued as well as an increase of ~$250 billion ofthe weekly Treasury bill auctions. Some estimate that by the end of the second quarter, the USTreasury will have issued an additional $1.5 trillion of Treasury debt.
Cash balances continue to build as shown by ICI reports of $4.7 trillion of total money marketfund balances as of April 29, up $1.1 trillion from January 29. Government and Treasury fundscurrently total $3.8 trillion (up $1.2 trillion since January 29) while Prime strategies total$698 billion (down approximately $100 billion since January 29) and Municipal strategiestotal $136 billion of AUM.
We expect a continued decline in money market fund yields that will be closely correlated tothe decline in commercial paper yields, Libor rates and floating rate note spreads. Governmentyields should remain range-bound given expected supply and desire by the Fed for yields toremain positive.