LONDON, Sept 17 (Askume) – Market expectations of a sharp U.S. interest rate cut this year make short-term debt unattractive as the Fed is unlikely to adopt such aggressive easing, Federated Money Market monetary policy manager Deborah Cunningham said.
The Federal Reserve will announce a policy decision on Wednesday that will almost certainly cut interest rates from 23-year highs.
Investors currently believe that an initial rate cut of 50 basis points is more likely than a 25 basis point cut, and the rate cut in the first three meetings before the end of the year is expected to be about 120 basis points.
In contrast, Federated Hermes is expected to cut interest rates by 25 basis points on Wednesday and another two basis points before the end of the year, Cunningham said.
“Short-term (U.S.) notes look unattractive right now,” Cunningham, chief investment officer at Global Liquidity Markets, told reporters.
“The best strategy in the short term is to invest at the long end of our yield curve – up to 13 months – but that is hard to do when you see very high expectations at the short end of the yield curve by this point.
Cunningham’s outlook differs from market pricing “because a large number of market participants expect a recession, but that’s not what we expect.”
Money market funds are mutual funds that invest in highly liquid, short-term debt products issued by governments or highly rated companies.
Traditionally, companies and investors viewed them as safe places to park cash, but as central banks raise interest rates, capital is pouring into this asset class to take advantage of the higher returns on offer.
Retail investors are also getting in on the action, with $6.3 trillion now invested in U.S. money market funds, according to the Investment Company Institute.
Three-month Treasury yields have fallen by about 56 basis points over the past three months. Two-year Treasury yields have fallen by a full percentage point in that time.
Cunningham said there are more opportunities to invest in short-term government bonds and short-term asset-backed securities in the UK, where the market is responding to lower interest rate cuts than in the United States, while short-term asset-backed securities are unattractive when interest rates rise.
Other asset managers are watching to see if money will flow out of money market funds as interest rates fall, but Cunningham said low interest rates on bank accounts mean he believes bank accounts will continue to attract inflows, pushing assets under management above $7 trillion.
