Supply Constraints Put Pressure on Rates

May 19, 2014 | By Global Liquidity

Interest rates fell in April as the Federal Reserve (Fed) issued what market participants considered more “dovish” statements regarding interest rates. Short-term rates also came under pressures amid a falling supply of Treasury bills as an influx of cash from April tax payments cut into the size of bill auctions. Supply constraints also took their toll on Libor rates, which fell during the month. As a result, the Fed’s reverse repo facility — and the 5 basis point floor that it offers — experienced increased participation, an average of $118 billion per day during the month, with participation increasing rapidly in the last two weeks of the month, peaking at $208.2 billion at month end.1

Invesco responded to the studies released by the Securities and Exchange Commission (SEC) related to its June 2013 proposals for additional reforms of money market mutual funds. In response to the SEC request for feedback on the studies from the industry, Invesco submitted a comment letter on April 23 focusing on the following three analyses: Analysis of Demand and Supply of Safe Assets in the Economy, Analysis of Liquidity Cost during Crisis Periods, and Analysis of Government Money Market Fund Exposure to Non-Government Securities. A link to Invesco’s comment letter can be found on the Invesco website at

1 The Federal Reserve Bank of New York, as of April 30, 2014

About risk
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
   Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest.
   Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
   If the seller of a repurchase agreement defaults on its obligation or declares bankruptcy, delays in selling the securities underlying the repurchase agreement may be experienced, resulting in losses.
   Reverse repurchase agreements involve the risk that the market value of securities to be repurchased may decline below the repurchase price or that the other party may default on its obligation, resulting in delays, additional costs or the restriction of proceeds from the sale.
   A basis point is equal to one hundredth of one per cent.
   Libor is the world’s most widely followed benchmark for short-term interest rates. Fixed daily, the Libor is the interest rate at which banks in the London interbank market can borrow overnight funds from one another. It serves as a base when determining interest rates for corporations and other large borrowers. An investment cannot be made directly into an index.
   The Federal Funds Rate is a volume-weighted average of rates on trades arranged by major brokers. The rate is calculated by the Federal Reserve Bank of New York using data provided by the brokers and is subject to revision. An investment cannot be directly into an index.
   Effective Fed Funds Daily Rate—The Rate represents the Federal Funds Effective Rate, a volume-weighted average of rates on trades arranged by major brokers. The effective rate is calculated by the Federal Reserve Bank of New York using data provided by the brokers and is subject to revision.
   The Securities Industry and Financial Markets Association Municipal Swap Index, produced by Municipal Market Data, is a 7-day high-grade market index comprised of tax-exempt VRDOs from MMD’s extensive database.
   Commercial paper is an unsecured, short-term debt instrument issued by a corporation. Maturities on commercial paper rarely exceed 270 days; it’s usually issued at a discount, reflecting prevailing market interest rates.
   Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.
   iMoneyNet categories: Government (All) is a combination of Government Retail and Government Institutional categories. Government Retail composed of Treasury, Treasury & Repo, and Govt & Agency Retail funds. Government Institutional composed of Treasury, Treasury &Repo, and Govt & Agency Institutional funds. Prime (All) is a combination of Prime Retail and Prime Institutional categories. Prime Retail composed of First Tier and Second Tier Retail funds. Prime Institutional composed of First Tier and Second Tier Institutional funds. Tax-Free (All) is a combination of Tax-Free Retail and Tax-Free Institutional categories. Tax-Free Retail composed of National and State Retail funds. Tax-Free Institutional composed of National and State Institutional funds.
   A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. For more information on rating methodologies, please visit the following NRSRO websites: and select “Rating Methodologies” under Research and Ratings on the homepage. and select “Ratings Definitions” on the homepage.
   All data as of April 30, 2014, unless otherwise noted.
   The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
   All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in such a fund.

The opinions expressed in this article do not necessarily reflect those of Invesco Distributors, Inc. and are subject to change at any time based on market or other conditions and offer no guarantee of future positive performance for any fund or security mentioned. This article is provided for educational and informational purposes only and is not an offer of investment advice or financial products. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, there can be no assurance that actual results will not differ materially from expectations. In addition, the results actual investors might have achieved may vary from those shown.