During a recent webinar, BNY Mellon and external experts explored the evolving landscape for Prime Funds in the months since Money Market Reform went into effect, the U.S. presidential election and in the wake of two fed funds target rate hikes in quick succession in December 2016 and March 2017.
BNY Mellon Markets recently held a webinar titled Prime Funds in a Rising Interest Rate Environment.
The event explored the evolving landscape for Prime Funds in the months since Money Market Reform went into effect, the US presidential election and in the wake of two fed funds target rate hikes in quick succession in December 2016 and March 2017. During the presentation, participants heard how following the Fed’s decision to raise interest rates, yield spreads between Prime Funds and Treasury Funds and Government Funds have widened.
Joe Quinn, Head of Product Development for BNY Mellon Liquidity Services, presented data comparing yield spreads between Treasury Funds, Government Funds and Prime Funds between November 2016 and March 2017 (see Figure 1).
While the spread between Treasury Fund and Prime Fund yields stood at 26 basis points in November 2016, that spread proceeded to widen out over the subsequent months as the Fed raised rates from 0.5% to 0.75% in December and then raised them again to 1% three months later.
By March, Treasury Fund yields had leapt to 48 basis points – the same yield Prime Funds had paid the previous November – while yields on Prime Funds had climbed to 82 basis points, widening the spread between the two fund types to 34 basis points. The spread between Treasury Funds and Government Funds remained consistent over the same period at 3 to 4 basis points.
Yields on all fund types have continued to climb in the months since.
“Just this morning, I took a quick look at some of the higher yielding Prime and Government Funds, and what I saw was yields on Prime Funds of 98 basis points up to 1% with yields on Government Funds of 65 to 66 basis points. That 33 to 34 basis points is a pretty good spread between Government and Prime Funds,” said Quinn, speaking on May 11.
During the second part of the webinar Marvin Loh, Boston-based Global Market Strategist, presented data indicating that the sharp rise in yields on US Treasury securities following the election were in part driven by market sentiment responding to political events, as well as expectations regarding rate hikes from the Fed.
Yields on two-year Treasuries stood at 1.3% as of May 11, with ten-year yields at 2.4%, stated Loh. Bonds of both maturities have seen yields jump by between 45 and 55 basis points since the US presidential election – but crucially a significant portion of that leap took place in the immediate aftermath of the election on November 8.
“Lest we forget, the Fed did hike rates twice during that period - they moved in December and again in March. What's interesting to us is that the increasing yields since the November election have been driven more by an increase in real yield, rather than by inflation expectations. The supply and demand part of the equation has driven yields. And we think that that indicates investors have been - and probably still remain - very focused on what comes out of Washington, with regard to legislation and reform and that still has the potential to have a fairly large impact in yields,” Loh explained.
“What's interesting to us is that the increasing yields since the November election have been driven more by an increase in real yield, rather than by inflation expectations. ”Marvin Loh, Boston-based BNY Mellon Global Market Strategist
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