Session Expiration Warning

    

Why So Low? Repo in the Driver's Seat

By Global Liquidity

  • Repo in the driver's seat. Low yields on repurchase agreements, or repos, throughout the month continued to put downward pressure on the yields of other short-term instruments and to drive further out the yield curve. Repo rates have remained low due to a sharp reduction in Treasury bill supply, an increase of cash in the front end of the yield curve and quantitative easing, which is removing collateral from the market.
  • Short-term yields still isolated from turbulence. Bond markets rallied in July on dovish comments by Federal Reserve Chairman Ben Bernanke that eased concerns about the immediacy of tapering. Shorter-term yields (under 1 year) have been less affected by tapering anxieties.
  • Ratings news: good and bad. Moody's revised their outlook for the US long-term sovereign debt from 'negative' to 'stable' citing deficit reduction efforts and an improving US economy. Earlier in the month, Fitch downgraded France's sovereign debt rating from 'AAA' to 'AA+' citing concerns regarding the country's debt burden.1
Past performance is not indicative of future results.

Past performance is not indicative of future results.


Table 1 - Short-Term Interest Rates
Indicator % 7/31/13 6/28/13 Change
(basis points)
Fed Funds Effective 0.09 0.07 0.02
Overnight Treasury Repo 0.07 0.05 0.02
3-month Treasury bills 0.02 0.05 (0.03)
Securities Industry and Financial Markets Association (SIFMA) 0.05 0.06 (0.01)

Source: Federal Reserve Economic Data, St. Louis Federal Reserve. Past performance is not indicative of future results. An investment cannot be made directly into an index.


Table 2 - Short-Term Yield Curves
Rates %
(7/31/13)
1 mo 3 mo 6 mo 1 yr
Agency Discount Rates 0.02 0.04 0.08 0.14
US Dealer Commercial Paper (A1/P1)1 0.18 0.23 0.35 -*
Libor 0.18 0.26 0.39 0.67

Source: Bloomberg, L.P.
Past performance is not indicative of future results. An investment cannot be made directly into an index.
* One-year data is not available, as maturities for commercial paper typically do not exceed 270 days.


Table 3 - Indicative 30-Day Simple Yields
Yield % 7/31/13 6/30/13 Change
(basis points)
iMoneyNet Prime (All) 0.02 0.02 -
iMoneyNet Government (All) 0.01 0.01 -
iMoneyNet Tax-Exempt (All) 0.01 0.01 -

Source: iMoneyNet, Inc. Past performance is not indicative of future results. An investment cannot be made directly into a category.


Table 4 - US Money Market Fund Industry Assets
($ Millions) 7/31/13 6/30/13 Change %
Prime 1,431,056 1,430,315 0.1%
Government 917,596 905,399 1.3%
Tax-Free 263,641 261,711 0.7%
Total 2,612,293 2,597,425 0.6%

Source: Investment Company Institute. An investment cannot be made directly into a category.


Table 5 - Macroeconomic Data
Indicators   Period Latest Preivous
Consumer Price Index % year-over-year June 1.8 1.4
Unemployment % July 7.4 7.6
PMI Manufactoring Index July 55.4 50.9
Housing starts '000s June 836 928
Real Gross Domestic Product % quarter-over-quarter Q2 1.7 1.1

Source: Bloomberg L.P. Past performance is not indicative of future results. An investment cannot be made directly into an index.


About risk

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Obligations issued by US Government agencies and instrumentalities may receive varying levels of support from the government, which could affect the fund's ability to recover should they default.

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.

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 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. Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.

Federal Funds Effective Rate is 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.

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.

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. First Tier Retail invests in commercial paper, bank obligations and short-term investments in the highest ratings category; open to individuals. Second Tier Retail invests in commercial paper, bank obligations and short-term investments in the highest two ratings categories; open to individuals. First Tier Institutional invests in commercial paper, bank obligations and short-term investments in the highest ratings category; open to corps/fiduciaries only ($100K min). Second Tier Institutional invests in CP, bank obligations and short-term investments in the highest two ratings categories; open to corporations/fiduciaries only ($100K min). 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.

1: 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. Long-term ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Short-term credit ratings are measured on a scale that generally ranges from A-1 (highest) to SP-3 (lowest) for Standard & Poor's and from P-1 (highest) to NP (lowest) for Moody's. S&P ratings will also denote those securities that possess extremely strong safety characteristics with a plus sign (+) designation. Ratings are subject to change without notice. For more information on rating methodologies, please visit the following NRSRO websites: www.standardandpoors.com and select "Understanding Ratings" under Rating Resources on the homepage; www.moodys.com and select "Rating Methodologies" under Research and Ratings on the homepage; www.fitchratings.com and select "Ratings Definitions" on the homepage.

All data as of July 31, 2013, 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.

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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 your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

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