The month of September proved to be quieter than anticipated — a “normal” return from vacation often brings a sell-off due to risk mispricing, accompanied by general market disarray. This year, however, despite added expected volatility ahead of the US presidential election, the end of summer saw very little change in money market rates or credit conditions.
The month of September proved to be quieter than some had anticipated. Typically at the end of summer we're faced with a sell off due to risk mispricing and general market disarray. Yet money markets saw very little change in rates or credit conditions.
Three-month commercial paper (CP) yields were higher by 1 basis point (bps) to 0.15% and 3-month Treasury bills (T-bills) were lower by 1bps to 0.10% We also saw a continuation in the spread compression between prime and government money market funds. According to the average of the ten largest funds, the prime versus government money market fund yield
difference compressed to 10bps. Of the funds in the group there remains a reasonable yield differential distribution with a low of 4bps and a high of 17bps. Forward rate agreements are also pointing to lower yields in the coming months. Historically the money markets have seen bank balance sheet pressure at year-end causing the yield spread between credit (CP) and rates (T-Bills) to widen. This year though, it appears not to be the case, or at least not to the extent we have seen in the past. It is wider by 2bps. It’s possible banks are comfortable with the regulatory hurdles they face and thus not scrambling to reduce leverage or the size of their balance sheet.
Historically, prime money market funds have enjoyed this period as it has led to higher yields. However, as is the case for other sources of higher yields, we will not be seeing that this year.