State Street Inv. Mgmt. on Year-End
State Street Investment Management tells us to, "Brace for an unwelcome gift this year-end." Author William Goldthwait writes, "The US money markets have been juggling more moving parts than a Broadway stage crew this month. Repo markets remain the star of the show, with more and more collateral needing funding, cue the scramble for cash. The Fed's standing repo facility has seen some volume, as policymakers try to remove the stigma of tapping it (because apparently, even liquidity tools have reputations). Still, the market rates are calling for more intervention and most likely the Fed will have to step in with temporary open market operations to smooth volatility." He explains, "A major contributor to this need for funding is quantitative tightening and that's ending on December 1. The Fed will keep its balance sheet at its current size. It will continue to allow its MBS positions to roll off, approximately $15 bn per month, and it will take those proceeds and reinvest into the T-Bill market. This should provide some relief. As we head into December, expect normalization in repo markets, but don't rule out a few dramatic scenes around year-end." Goldthwait comments, "It appears the Federal Open Market Committee (FOMC) is poised to ease the policy rate by 25 bps at its December meeting -- a move that would cap 2025 with a total of 75 bps of cuts and a more accommodative stance. However, the Fed would be making this decision without the benefit of October and November's jobs data.... This adds an extra layer of uncertainty to the outlook, even as markets broadly welcome the prospect of lower rates." He adds, "Strategically, we're keeping things nimble and liquid -- because, in December, flexibility is the ultimate gift. Weighted average maturity (WAM) remains neutral to slightly long, but we will be opportunistic where spreads offer value, particularly in short-dated paper that helps us navigate liquidity needs. We continue to prioritize high-quality issuers and overnight instruments, ensuring the fund can handle any year-end surprises without breaking a sweat. Think of it as wearing sneakers to a holiday party: practical, but ready to move fast if the music changes. Liquidity management is front and center as we approach year-end, with repo market dynamics and client flows adding complexity. We are actively coordinating with clients on cash flows because nothing says 'festive stress' like a major cash flow on December 24th. Our approach is proactive, aiming to avoid last-minute scrambles and maintain strong liquidity buffers. In short, we're planning ahead!"
