With the Federal Reserve likely to hike short-term rates from near zero levels, one group of fixed-income investors who utilize money market funds and ultra-short-term bond exchange traded funds as cash alternatives may stand to benefit.
The extended near-zero-rate environment has depressed returns for money market funds that invest in assets with maturities of 12 months or less, reports Joe Rennison for the Financial Times. Consequently, with the Fed set to hike rates for the first time in almost a decade, these ultra-short-term cash equivalents could begin to offer higher yields.
“It will be great news for money market funds,” Debbie Cunningham, chief investment officer at Federated Investors, told the Financial Times. “It means the return from our portfolio composition back to the end shareholders is improving and that hasn’t happened since 2008.”
Yields on short-term debt are already moving higher, with three-month Treasury bills showing yields that have doubled to 24 basis points over the past month.
“Money market funds are absolutely ecstatic. For the first time in a decade they are going to be in a rate-rising environment,” Joseph Abate, a rates strategist at Barclays, told the Financial Times.
In anticipation of the higher rates, some money market funds have already been reducing their maturity exposure to take full advantage of higher rates as soon as possible. The weighted average maturity of prime institutional money market funds stood at 28 days last week from 32 days at the start of October, according to Crane data.