Quarterly Portfolio Manager Commentary

April 2021



First American Money Market Funds

What market conditions had a direct impact on the bond market this quarter?

The U.S. economic outlook has improved on the prospect for a sustained economic reopening and a flood of fiscal stimulus. Pent-up demand for goods and services along with strong consumer finances are expected to drive growth and inflation levels higher in the second quarter. Inflation fears have lifted longer rates and steepened the U.S. Treasury curve, a trend expected to continue through much of 2021.

Economic Activity – The economic outlook for 2021 is exceptionally robust as economic reopening accelerates and consumer finances are bolstered by employment gains and fiscal stimulus checks. Consensus forecasts suggest 4.7% and 5.8% growth rates for the first quarter and all of 2021, respectively. Employment growth increased in the quarter with Non-farm Payrolls (NFP) adding 1.617 million jobs, including a 916k jump in March. The U3 Unemployment Rate fell to 6.0% from 6.7% at the end of 2020. Despite the strong gains, NFP data shows the economy has still shed 8.4 million jobs since last February. March’s stellar ISM Manufacturing and ISM Services readings of 64.7 and 63.7 respectively confirm the acceleration of activity. For context, any reading over 50 indicates sector expansion and the 64.7 Manufacturing print was the highest since 1980. The Federal Reserve’s (Fed) preferred inflation index – the PCE Core Deflator Index – remained subdued at 1.4% in February. However, inflation expectations as measured by the five-year TIPs vs. Treasuries continue to move higher, reaching 2.6% at the end of the quarter.

Monetary Policy – Pushing back on growing perceptions they may be falling behind the inflation curve, the Fed did not alter current policies at either the January 27th or March 17th meetings. Chairman Powell has remained steadfast in views the Fed should and will maintain highly accommodative monetary policies until substantial progress has been made achieving the twin goals of maximum employment and 2% average inflation. The March 17th Fed Dot Plot still forecasted the first rate hike for 2024, although some FOMC participants signaled an earlier rate hike may be warranted. The Fed remained committed to monthly net purchases of $80 billion in U.S. Treasury Securities and $40 billion in agency mortgage-backed securities, although there is significant debate over when the Fed should signal the need to taper purchases.

Fiscal Policy – The Biden Administration and Democratic-controlled Congress passed a $1.9 trillion COVID-19 relief package in March. The legislation sends direct payments of $1,400 to most Americans and extends a $300 enhanced unemployment benefit until September 6th, further bolstering consumer savings accounts. $350 billion in aid was also provided to state and local governments to counter the fallout from economic shutdowns. The sizable package comes on the heels of a $900 billion COVID-19 relief bill passed in the last week of December. Further, the Biden Administration is proposing a $2+ trillion plan to address the country’s infrastructure as well as funding many traditional Democratic priorities. President Biden is proposing to pay for his plan with tax increases, including an increase in the corporate tax rate from 21% to 28%. The scale of fiscal relief with the prospect for more being injected into a growing economy is virtually unprecedented and has stoked inflation fears impacting the yield curve and sparked debate over the appropriateness of current Fed policies and guidance.

Credit Markets – For much of the first quarter, front-end U.S. Treasury yields were under pressure from the flood of cash entering the system through the Fed’s asset purchases and the drawdown of the Treasury’s General Account. The Fed’s commitment to keeping policy rates near zero through 2023 limits the downside risk of front-end yields moving higher, while the yield curve’s proximity to zero offers little room for further declines. Longer yields will remain under pressure to move higher as growth and inflation measures accelerate to the upside. Yields beyond three years are more vulnerable to positive economic and vaccine news, increasing the risk of further yield curve steepening. Corporate credit conditions remain robust with strong primary and secondary market liquidity.

Yield Curve Shift

U.S. Treasury Curve

Yield Curve 12/31/2020

Yield Curve 3/31/2021

Change (bps)*

3 Month




1 Year




2 Year




3 Year




5 Year




10 Year




*The three-month to ten-year portion of the yield curve steepened 81.9 basis points (bps) to 172.5 bps. The severe steepening reflects the different market dynamics impacting front-end yields vs. longer-dated maturities, with three-month T-bills controlled by Fed rate policies and flows into the money market space and ten-year yields driven by growth and inflation expectations.

Duration Relative Performance

*Duration estimate is as of 3/31/2021

ICE BofA Treasury Index Definitions

Benchmarks with exposure to maturities longer than three years were heavily impacted by the significant first quarter yield curve steepening.


Credit Spread Changes

ICE BofA Index

OAS* (bps) 12/31/2020

OAS* (bps) 3/31/2021

Change (bps)

1-3 Year U.S. Agency Index




1-3 Year AAA U.S. Corporate and Yankees




1-3 Year AA U.S. Corporate and Yankees




1-3 Year A U.S. Corporate and Yankees




1-3 Year BBB U.S. Corporate and Yankees




0-3 Year AAA U.S. Fixed-Rate ABS




*OAS = Option-Adjusted Spread

ICE BofA Index definitions

Option-Adjusted Spread (OAS) measures the spread of a fixed-income instrument against the risk-free rate of return. U.S. Treasury securities generally represent the risk-free rate.

Corporate credit spreads were slightly wider for BBB and A-rated credits. The adjustment was related more to a mild normalization of spreads from historically low levels than a deterioration of corporate credit conditions.

The 7.706% one-year performance of the ICE BofA 1-5 Year U.S. Corporate Index (CVA0) illustrates the remarkable recovery in corporate credit spreads:


OAS (bps)

Effective Yield

Implied UST Yield













*USBAM marks 3/23/2020 as the peak of pandemic-inspired market dysfunction.

Credit Sector Relative Performance of ICE BofA Indexes

ICE BofA Index definitions

*AAA-A Corporate index outperformed the Treasury index by 0.7 bps in the quarter.

AAA-A Corporate index underperformed the BBB Corporate index by 14.1 bps in the quarter.

U.S. Financials outperformed U.S. Non-Financials by 16.2 bps in the quarter.


As expected, performance differentials among asset classes compressed vs. previous quarters as credit spreads seem to have reached a limit for additional tightening. Non-financials outperformed financials, driven primarily by the general lack of supply and high demand for investment grade industrial credit.

What were the major factors influencing money market funds this quarter?

The first quarter of 2021 cast a more positive tone as economic data improved, COVID-19 vaccinations gained momentum and overall market optimism began to spread. However, the money market yield environment remained challenged as technical forces pushed additional cash into the system coupled with the FOMC’s existing stimulative monetary policy actions. As a result, the money market industry experienced additional inflows as this new cash searched for a home. U.S. Treasury bill and Repo levels remained entrenched at the bottom of the FOMC’s fed funds rate target with little sign of near-term relief.

First American Prime Obligations Funds

Credit spreads have tightened and stabilized, reflecting the trading ranges and yields we should expect in the current low rate environment. Still facing an uncertain economic and political backdrop, we positioned the funds with strong portfolio liquidity metrics influenced by fund shareholder makeup. We continued to employ a heightened credit outlook as we maintained positions presenting minimal credit risk to fund investors. Under the current market conditions, our main investment objective was to maintain liquidity and judiciously enhance portfolio yield based on our economic, investor cash flow, credit and interest rate outlook. We believe the credit environment and relative fund yields make the sector an appropriate short-term option for investors.

First American Government and Treasury Funds

Treasury and government funds continued to see inflows as the monetary system cash balances grew. Treasury Bill / Note supply decreases resulting from the reduction in U.S. Treasury general account pushed Government-Sponsored Enterprise (GSE) and Treasury yields to a trading range near the bottom of the FOMC’s fed funds target. Management continued to focus on securing long-term yield when rangebound trading opportunities arose, seeing little downside to extension, anticipating a low yield environment for the foreseeable future. Throughout the quarter, we also capitalized on opportunities in floating-rate investments that we believed made economic sense and felt would benefit shareholders over the securities holding period.

First American Retail Tax Free Obligations Fund

Investors continue to search for better yielding alternatives to tax-free money market funds. During the first quarter, the industry experienced outflows of approximately 7% of total assets under management (AUM) or $7 billion. This is particularly noteworthy as this period does tend to see a higher amount of reinvestment demand from municipal bond coupon payments and maturities. The tax-free money market fund industry AUM is currently at its lowest level in nearly 30 years. Despite the steady money market outflows, demand for short term municipal securities has remained strong. Municipal bond funds have seen fairly consistent inflows since the middle of last year. Recent volatility in the intermediate and long end of the yield curve may be encouraging some investors to focus efforts on bonds with shorter maturity notes and bonds. The Fund continues to be positioned with a longer weighted average maturity and higher allocations to fixed-rate investments vs. many of its peers. However, considering the steady outflows and lower market yields, we have allowed the Weighted Average Maturity (WAM) to shorten over recent weeks. We expect strong municipal market technical factors during the summer months and will be motivated to extend the fund’s WAM ahead of June.

What near-term considerations will affect fund management?

In the coming quarters, we anticipate yields will stay depressed as the U.S. progresses through the COVID-19 pandemic and the FOMC’s commitment to ease monetary policy. It appears the yield on non-government debt has bottomed as LIBOR has found a floor with supply-demand dynamics in equilibrium. We believe that prime money market fund yields are near a floor as most seasoned / pre-pandemic holdings have matured. Both the institutional and retail prime obligations funds will remain reasonable short-term investment options for investors seeking higher yields on cash positions while assuming minimal credit risk.

Yields in the GSE and Treasury space will remain influenced by Fed policy and Treasury bill / note supply. We believe the Fed will provide the tools necessary to normalize the repo market, foster market liquidity and keep front-end rates above zero. Assuming no additional Fed policy adjustments, we anticipate T-bill / note issuance to decline, providing the sector with further challenges to invest large balances efficiently. Any supply changes in Treasury issuance may create some yield volatility on the short end as the forces of supply and demand seek optimization. We will continue to capitalize on investment opportunities, in all asset classes and indexes, based on domestic and global economic market data as well as changes in our Fed rate expectations.

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