A show of force

Jul 25, 2022
  • BlackRock

An outlook for persistently elevated inflation suggests increases in the target range for the federal funds rate by the Federal Open Market Committee (FOMC or the Committee) of at least 0.50% are possible, in our view, at the next few FOMC meetings.

Read our quarterly commentary

U.S. Cash Management investment commentary

The second quarter saw the removal of monetary accommodation at an accelerating pace and a continued strong disparity between supply and demand at the front end of the market.

At its meeting on June 15, the FOMC raised the federal funds target rate by 0.75%, to a new range of 1.50% to 1.75%.1 This action was the third increase in the Federal Reserve’s (Fed) official policy rate since “lifting off” from the “zero lower bound” at the FOMC meeting on March 16. It was the first 0.75% increase in the federal funds target rate since 1994.

In a statement released in conjunction with the meeting,1 the Committee reiterated that it is “highly attentive to inflation risks,” and added that it is “strongly committed to returning inflation to its 2.00% objective.”

Second Quarter Highlights

Q2 summary highlights

The BlackRock opinions expressed are as of June 30, 2022 and are subject to change at any time due to changes in market or economic conditions. Forecasts are based on estimates and assumptions. There is no guarantee that they will be achieved.

Government & Treasury funds

Consistent with the decrease in assets of government MMFs across the industry, BlackRock government funds experienced net outflows during the second quarter. This is typical, as investors look to deploy their prior quarter-end liquidity balances.

Throughout the quarter, our focus was to ensure ample liquidity for any potential flow volatility. Since last quarter-end, we have preferred a below-neutral duration profile across our government funds; however, the shift in interest rate policy dynamics has resulted, in our view, in more favorable entry points to extend duration. Purchases throughout the quarter were mostly comprised of 2-month T-bills at an average yield of 0.72% and 3-month T-bills at an average yield of 1.03%.

Prime funds

Consistent with the industry, BlackRock prime MMFs experienced net outflows during the second quarter. We believe these outflows are largely driven by the current market environment, as uncertainty remains around inflation data, future rate hikes, and the ongoing war between Russia and Ukraine. However, with the FOMC’s removal of policy accommodation to combat inflation, yields of the BlackRock prime funds continued to rise during the period. According to iMoneyNet’s 30-day SEC yield spread,2 yields of prime funds widened by 0.16% over government funds as of June 30. This has been the widest spread between the two MMF strategies since the COVID-19 pandemic.

Our strategy throughout the quarter focused on maintaining a short duration profile given persistent strong inflation data and a series of expected rate increases by the FOMC. The target Weighted Average Maturity (WAM) and Weighted Average Life (WAL) in our prime funds was between 15 to 20 days and 60 to 65 days, respectively, while we maintained weekly liquidity levels around 45% to 50%.

Municipal funds

Despite the municipal market as a whole continuing to see outflows in the second quarter, tax-exempt money funds continued to benefit from uncertainty, as inflows of $610 million were reported, bringing total industry assets to $103.25 billion at quarter-end.

Our municipal MMFs are positioned with high levels of daily and weekly liquidity as we continue to pursue a more defensive investment strategy in our national fund as well as our state-specific funds. We remain selective given current valuations for municipal notes and bonds, with target WAMs positioned in the 15 to 20 days range for all funds.

Ultra-short bond funds

Consistent with the industry, BlackRock Short Obligations Fund experienced net outflows during the second quarter.

Quarter-end positioning for the BlackRock Short Obligations Fund reflected our view of an aggressive rate hiking cycle for the remainder of 2022. The Fund was positioned to take advantage of the next two expected rate hikes, with 8.2% of the Fund set to mature by end of July, and 18.1% set to mature by end of September. An additional 34% of the Fund was made up of SOFR floaters, which reset daily and have benefited the Fund following each rate hike in 2022.

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