Excessive Fed rate cuts make Treasuries unattractive, Federated Hermes says

By Alun John

LONDON (Reuters) – Market expectations of substantial U.S. interest rate cuts this year make short-term debt unattractive as the Federal Reserve is unlikely to be as aggressive in easing monetary policy, said Deborah Cunningham, manager of money market funds for Federated Hermes on Tuesday.

The Fed gives its policy decision on Wednesday and is almost certain to cut interest rates from their 23-year high.

Investors currently believe a 50 basis point cut is more likely to start than a 25 basis point cut, and are pricing in about 120 basis points of cuts for the three meetings through the end of the year.

Federated Hermes, on the other hand, expects a 25 basis point cut on Wednesday and two more such cuts by the end of the year, Cunningham said.

“Right now, the (US) short-term paper looks unattractive,” said Cunningham, chief investment officer for global liquidity markets.

“The best short-term strategy is to invest on the longer side of our yield curve – up to 13 months – but it’s hard to do that when you’re looking at a yield curve that at the short end is expecting a lot more. (cuts) than we are.”

Cunningham’s view differs from market pricing “because there are quite a few market participants who expect a recession, which is not our expectation.”

Money market funds are mutual funds that invest in highly 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 have poured funds into the asset class as central banks have raised rates, taking advantage of the higher yields on offer.

Retail investors also got in on the action, and a total of $6.3 trillion is currently invested in U.S. money market funds, according to data from the Investment Company Institute.

The yield on a three-month Treasury note has fallen by about 56 bps over the past three months. During that period, there was a complete decline in two-year yields.

Cunningham said there were more opportunities to invest in short-dated government bonds in the UK, where markets are pricing in fewer interest rate cuts than in the US, as well as short-dated tranches of asset-backed securities, which have been unattractive when rates were rising. .

Other asset managers are watching to see if money flows out of money market funds as interest rates fall, but Cunningham said low interest rates on bank accounts mean he sees them continuing to attract inflows and that assets under management will reach a peak of more than $7 trillion.

(Reporting by Alun John; Editing by Amanda Cooper and Shreya Biswas)