4.5% 2 year T bill and Credit Risk on Money Market Funds
I was just listening to the CNBC Bond expert. He was being questioned about the 4.5% yield on 2 year Treasuries. The question presented the theory that the 2 year yield should equate to what the average Fed Funds Rate will be over the next 2 years, thus indicating some major Fed rate cuts in the next 2 years. The Bond expert said, No. That's not right. What's really happening is the pricing in of Credit Risk on super short term debt, I assume like that which Money Market Funds hold.
If it's true that the low 2 year Treasury yield is pricing greater risk on Money Market type Funds, then I'm puzzled. Why should Money Market Funds be any more risky than they've ever been, which I've always understood to be practically no risk? Has the Treasury Bond market gone overboard pricing risk here? In which case, shouldn't there be an arbitrage oportunity? Or is the 2 year Treasury Bond really signalling some heavy Fed Rate cuts over the next 2 years?
I don't think the observation that liquidity is just being parked in Treasuries right now really explains the situation. If the market thinks Fed Funds will not average 4.5% over the next 2 years then liquidity should be using the Money Market parking lot rather than Treasuries. That is, unless the market sees Money Market Funds as being at higher risk than in the past.
PairTheBoard
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