A Familiar Course

Global Liquidity Markets

The success of the Fed’s first taper gives us confidence it will work well again.

2013 seems so long ago—and if you don’t agree, a few tidbits should do the trick. That was the year of Pope Francis’ inauguration, the Candy Crush app and the indulgent Cronut. Selfies reached such a fever pitch the Oxford dictionary selected it Word of the Year. Pittsburgh cheered for baseball again as our Pirates won their first postseason game since 1992. And in December, the Federal Reserve announced it would begin to reduce its asset purchase program.


Granted, tapering is hardly a memorable event for most of the world. But many are recalling it now that it’s soon likely to happen again—potentially following this week’s Federal Open Market Committee meeting. For his part, Chair Jerome Powell said on Oct. 22 that, “I do think it’s time to taper.” It’s helpful to recall 2013 because the process went smoothly (the taper tantrum happened earlier in the year). We expect the same outcome this time. And we anticipate the deliberate, orderly process will benefit the money markets at a similar pace.


While the Treasury market probably won’t budge from its low levels for some time—Powell also said, “I don’t think it’s time to raise rates”—spreads in the prime space have been widening. (This is being seen in the Bloomberg Short-Term Bank Yield Index, or BSBY—the industry replacement for the London interbank offered rate.) We believe the steepening at the short end is due to how prime money funds and the like continue to show resilience in the face of uncertain market conditions. We think BSBY yields will continue in that positive direction.


Of course, there’s a litany of issues clouding the picture. We were not surprised by the poor third-quarter gross domestic product (GDP) growth, though the 2% annualized reading was lower than expected. Headwinds could come if Covid-19 surges in the winter or another variant emerges. And the toxic politics in Washington make even the basic function of raising the federal debt limit a heavy lift.


But if these potentials don’t come to pass, the debt ceiling is raised and GDP growth picks up in 2022 as we project, the markets could get a boost. Other good news should come with the “hard” infrastructure bill, now closer than ever to becoming law. Municipalities and local governments have strong balance sheets swelled by timely tax payments and fiscal stimulus. The bill will be ice cream for them, but should have a long-term positive impact.


Even regulations on the money market fund front seem to be taking a good turn. The case for delinking liquidity thresholds and fees/gates has gained support by the majority of industry participants and we think also by some regulators. That the ultimate authority on this, the SEC, has put reform on the back burner, behind issues like responsible investing disclosures, indicates it may be considering more modest measures. We still argue for an industry-wide standing facility or something similar, rather than regulation targeting money funds, because the crisis in 2020 affected the broad liquidity market.


In October, we kept the weighted average maturities of our money funds in target ranges of 35-45 days for government and 40-50 days for prime and municipal.

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