Nifty Fifty

Market outlook

• Information contained in the Federal Open Market Committee’s (FOMC, the Committee, or the Fed) Summary of Economic Projections (SEP) released at the September FOMC meeting reflected a projection of two additional 0.25% interest rate cuts over the balance of 2024, and additional cuts totaling 1.00% in 2025 and 0.50% in 2026. The SEP also forecasted modestly lower inflation and an upturn in the unemployment rate in 2024.
• In turn, we believe the FOMC will continue to move to adjust the federal funds target range lower at upcoming meetings should data continue to point to a continued easing in price pressures and a further softening in labor market conditions and expect the size and timing of future adjustments will remain ‘data dependent.’
• Net T-bill issuance is expected to pick up October and November following a contraction in September, before trailing off later in the year.

Q3 highlights

• The FOMC lowered the federal funds rate by 0.50% to a range of 4.75% to 5.00%, the first change in its key policy rate since July 2023 and the first reduction since March 2020. One member of the Committee dissented in favor of a 0.25% cut.
• The statement¹ released in conjunction with the meeting was revised to acknowledge “greater confidence that inflation is moving sustainably toward” the Committee’s 2.00% goal, and that the FOMC now sees “risks to achieving its employment and inflation goals” as “roughly in balance.”
• Guidance about the path of policy was unchanged, with the Committee noting that additional changes in the federal funds target range would be based on an assessment of various factors including incoming data.
• The statement was also revised to note that the FOMC is “strongly committed to supporting maximum employment” while retaining their comparable focus on bringing inflation back to its 2.00% goal.
• The median federal funds rate forecast contained in the SEP² released in conjunction with the FOMC meeting for 2024 fell to 4.40%, implying, in our estimation, two additional cuts of 0.25% over the balance of 2024.
• The updated SEP for 2024 reflected slightly lower core inflation and economic growth forecasts, and a higher unemployment projection relative to June. Core inflation is still not projected to fall to the FOMC’s 2.00% objective until 2026.
• Despite contracting over $100 billion in September, net T-bill issuance rose $239.3 billion during the quarter.³ Reverse repurchase agreement (RRP) utilization ranged between $239.4 billion, its lowest level since May 2021, and $465.6 billion.⁴
• Assets across the US money market fund (MMF) industry increased $321.001 billion during the third quarter. Assets of government MMFs and prime MMFs rose by $313.442 billion and $7.625 billion, respectively, while municipal MMFs fell by $66.00 million.⁵

Similar to the increase in government MMF assets across the industry, BlackRock government funds experienced net inflows during the third quarter.

Short-term Treasury rates fluctuated throughout the quarter, as markets prepared for the Federal Reserve to begin its rate cutting campaign. The 1-month Treasury bill ended the period down 56 basis points at 4.82%, while the yield on the 12-month tenor closed the quarter down 95 basis points at 4.38%. The 12-month tenor was the biggest mover, hitting a high of 5.18% during the quarter and dropping to 3.91% before finishing the period at 4.01%.⁶

Although the recent Summary of Economic Projections pointed to the median dot moving from one rate cut in 2024 up to four total rate cuts by the end of the year, the implied pricing in the futures market has increased to reflect nearly two more 25 basis points rate cuts over the remaining two FOMC meetings for the year.

At the start of the quarter, weighted average maturities (WAMs) in our government funds hovered near 39 days for RRP-eligible funds and 45 days for non-repo funds. By the end of the quarter, these figures decreased to 30 and 41 days, respectively.

Purchases throughout the quarter were mostly comprised of 2-month and 4-to-6-month T-bills at average yields of 5.01% to 5.23%.⁷

Year to date, markets received over $1.5 trillion of Treasury bill and coupon supply, with a heavy skew towards bills. Additional projected issuance is expected to be skewed towards coupons.

While eligible funds utilized the Fed RRP throughout the period, aggregate usage of the facility continued to decline. Investors who favored the Fed RRP as an alternative to short-dated government securities began rotating into new Treasury supply, and dealer repo rates remained more attractive, in our opinion.

We will continue to selectively add longer fixed rate duration to lock-in term rates as overall economic and inflation data has softened and created uncertainty regarding the future path of monetary policy.

Consistent with the increase in assets of prime MMFs across the industry, BlackRock 2a-7 prime funds experienced net inflows during the third quarter.

We believe investors exhibited demand for prime funds to take advantage of the incremental yield and diversification. At quarter-end, the spread between institutional government and prime MMF yields was 0.16%.⁸

Tier 1 Commercial Paper (CP) outstandings decreased by $23.3 billion over the quarter to $373.6 billion. As expected, CP rates continued to reprice in line with expectations for the future path of monetary policy. Financial CP within our prime funds maturing in three months or less ended the quarter with an average yield of 4.85%.

Rates on money market deposit instruments, including time deposits and certificates of deposits, decreased throughout the quarter in line with rate cut expectations for the Federal Reserve. Unsecured overnight rates averaged 5.27% during the quarter, below the quarter high of 5.40%.⁹

Purchases during the period were primarily of certificate of deposits and time deposits, CP and overnight repo for eligible portfolios.

Although we favored a shorter-duration stance over the last several months to protect against interest rate risk, we remain focused on adding exposures to highly rated longer tenor positions to add duration where appropriate to lock in attractive fixed-rate positions. At quarter end, our target WAM range was 35 to 40 days, and the funds had an average weekly liquidity of approximately 57.00%.¹⁰

Flows for tax-exempt money funds were relatively flat for the third quarter, ending with approximately $129.0 billion in industry assets.

Dealer variable rate demand note (VRDN) inventory ended the period at $4.0 billion, slightly below the rolling 12-month average of $4.1 billion. The Securities Industry and Financial Markets Association (SIFMA) Index, which represents the average yield on 7-day municipal floating-rate debt, began the quarter at 3.88%, fluctuated between 2.57% and 4.21%, and reset to 3.15% at quarter-end.

Total VRDNs outstanding ended the period around $100.3 billion as tax-exempt money fund industry assets continued to surpass VRDN supply.

MuniCash remained positioned in the 5- to 6-day WAM range with high levels of daily and weekly liquidity, as the fund intends to invest solely in securities that are considered weekly liquid assets under Rule 2a-7 under the Investment Company Act of 1940, as amended, typically maturing in five business days or less.

Though MuniCash invests in weekly liquidity only, for broader market color, within the fixed-rate space, 1-year municipal bond yields and 1-year municipal note yields decreased from 3.15% and 3.51% to 2.50% and 2.83%, respectively. 

Finally, seasonal note issuance is now complete, although some municipalities may need to address additional operating finance needs. Total issuance year-over-year remains subdued compared to pre-pandemic issuance levels as municipal fundamentals remain supportive. 

Consistent with the theme across the ultra-short bond industry, the BlackRock Short Obligations Fund experienced net outflows throughout the third quarter.

Tier 1 CP outstandings decreased by $23.3 billion to $373.6 billion during the quarter. Additionally, Tier 2 CP outstandings decreased by $9.6 billion to $102.1 billion at the end of September.¹¹

Yields in the Investment Grade (IG) space were volatile throughout the quarter, with the yields on the JULI All Ex EM 1- to 3-year Index ranging between 4.19% and 5.38%.¹²

Spreads widened at the start of the quarter, as investors began to expect a slowdown in economic activity. As the quarter progressed, spreads tightened as demand for yield continued to outpace IG supply. As rates responded to weakening economic conditions and future Fed expectations, IG yields moved lower throughout the quarter.

The third quarter was heavy in IG issuance with $400.0 billion in supply coming to market, largely driven by non-financials. Overall, investors continue to assess the Federal Reserve’s path of monetary policy and the outlook for economic growth.

Throughout the quarter, our focus was keeping the fund well positioned by focusing purchases on CP maturing between 1-week and 6-months at yields ranging from 5.08% to 5.67%. Other investments consisted of 1-week time deposits at a 5.31% yield, bonds maturing in 2-years and beyond at a 4.54% yield and 6- to 12-month CDs with yields ranging from 4.80% to 5.59%.¹³

The market has continued to price in rate cuts for the remainder of 2024; however, the size of cuts is subject to change as economic data continues to be released. In IG, spreads remain resilient and demand for yield continues to digest the elevated supply.