Over-priced Fed rate cuts make T-bills unattractive, Federated Hermes says

Federated Hermes

17/09/2024 13:12

By Alun John
       LONDON, Sept 17 (Reuters) - Market expectations of
substantial U.S. rate cuts this year are making short-dated debt
unattractive as the Federal Reserve is unlikely to be as
aggressive in easing monetary policy, said Deborah Cunningham, a
money market fund manager for Federated Hermes, on Tuesday.
    The Fed delivers its decision on policy on Wednesday and is
all but certain to cut interest rates from their 23-year high.
    Investors currently think it more likely to begin with a
50-basis-point cut than with a 25-basis-point one and are
pricing around 120 bps of cuts across the three meetings by year
end. 
    Federated Hermes, in contrast, expects a 25-bp cut on
Wednesday and two more such cuts by year end, Cunningham said. 
    "Short term (U.S.) paper at this point looks unattractive,"
Cunningham, chief investment officer for global liquidity
markets, told reporters.   
    "The best strategy in the short term is to invest in the
longer end of our yield curve - out to 13 months - but it is
hard to do that when you're looking at a yield curve that at the
short end is expecting way more (cuts) than we are." 
    Cunningham's view differs from market pricing "because there
are quite a few market participants that expect a recession,
which is not our expectation." 
    Money market funds are mutual funds that invest in very
liquid short-term debt products issued by governments or highly
rated companies. 
    Companies and investors have traditionally seen them as safe
places to park cash, but poured funds into this asset class as
central banks raised rates, taking advantage of the higher
returns on offer. 
    Retail investors too have got in on the act and in total,
$6.3 trillion is currently invested in U.S. money market funds,
according to data from the Investment Company Institute.
 aUSFAMTA  
        The yield on a three-month Treasury bill  US3MT=RR  has
fallen around 56 bps in the last three months. There has been a
full percentage point decline in two-year yields  US2YT=RR  in
that time.
  
    Cunningham said there were more opportunities to invest in
short-dated government bonds in Britain, where markets are
pricing fewer rate cuts than in the U.S., as well as short-dated
tranches of asset-backed securities, which had been unattractive
when rates were rising. 
    Other asset managers are watching to see whether money flows
out of money market funds as interest rates fall, but Cunningham
said low interest rates on bank accounts meant she saw them
continuing to attract inflows and that assets under management
would peak over $7 trillion.

 (Reporting by Alun John; Editing by Amanda Cooper and Shreya
Biswas)
 ((alun.john@thomsonreuters.com;))