Federated Hermes Bets on Easing, Extending Money Market Fund Maturities
Federated Hermes Inc. is increasing the maturities of its money market funds to near their maximum limits, a move that reflects the company's belief that market expectations for US interest rate hikes are premature and that further easing is likely.
Deborah Cunningham, Federated's chief investment officer for global liquidity markets, stated that the team is acquiring longer-dated securities to secure yields. They anticipate that the Federal Reserve, which is expected to hold interest rates steady on Wednesday, will implement additional quarter-point cuts this year. Cunningham dismisses speculation that the central bank will tighten policy in 2025 as "extreme."
The Federated Hermes U.S. Treasury Cash Reserves fund, which has witnessed a significant expansion in size in recent years, demonstrates Cunningham's strategy. Its average maturity exceeded 50 days last week, a first since late 2021.
Industry-wide, the weighted average maturity (WAM) of the 100 largest money-market funds has increased to 38 days from 30 days in September, per Crane Data.
Money-market funds often extend WAMs ahead of anticipated easing. However, they face a risk if rates increase, resulting in funds with bills that mature more slowly. The Fed is expected to maintain interest rates on Wednesday, following a one-percentage-point reduction since September.
Swap markets suggest two additional quarter-point cuts in 2025. Conversely, the European Central Bank is likely to cut rates by 25 basis points on Thursday amid economic growth concerns. Cunningham projects that the ECB will make four cuts in 2025, reducing its deposit rate to approximately 2%, although her base case is for it to stabilize at 2.25%.
She stated, "I anticipate they will reach their target and maintain it for a period, potentially in the second half of the year. I doubt it will fall below 2%."