Quarterly Portfolio Manager Commentary

September 30, 2023

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Cash Management Portfolios

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

Economic Activity – U.S. economic activity continues to defy expectations for a sharp slowdown as it displays surprising resiliency in the face of aggressive Federal Reserve (Fed) monetary policy tightening. U.S. Gross Domestic Product (GDP) growth is projected near 3.0% for Q3, led by strong consumer spending and business fixed investment comparable to the second quarter’s 2.1% pace. Personal consumption accelerated in Q3 as U.S. households continue to benefit from moderating price pressures and solid job and income gains, supporting resilience to tighter financial conditions and lending standards. Recent employment trends have shown gradual moderation, but conditions remain quite firm with August U.S. job openings standing at 9.6 million open positions versus total unemployed workers in the labor force of 6.4 million. Monthly Non-farm Payrolls (NFP) growth continues to be strong, averaging 266,000 during Q3, and the U3 Unemployment Rate was 3.8% in September. Growth in Average Hourly Earnings is off its highs but still elevated at 4.2% year-over-year (YoY), further emphasizing strong labor demand. Headline inflation readings increased throughout the quarter, reflecting rising energy prices with the Consumer Price Index (CPI) at 3.7% in August (3.0% in June). Core inflation, however, continued its gradual downward trend with CPI ex. food and energy rising 4.3% YoY for August compared to 4.8% YoY in June. The Fed’s preferred inflation index – the PCE Core Deflator Index – increased 3.9% YoY for August. While the continual decline in core inflation is encouraging, the economy remains a long way from the Fed’s target of sustained 2% inflation.

Monetary Policy – The Fed further tightened monetary policy during the quarter, raising the federal funds rate by 25 basis points (bps) at the July 26 meeting to a target range of 5.25% to 5.50%. The Fed elected to keep rates unchanged at its September 20 meeting as they continue to monitor incoming economic data and access lagged impacts of prior rate increases. The September rate pause was viewed as hawkish, with the Fed emphasizing stronger growth could prompt further rate hikes. Additionally, the Fed continued to implement its balance sheet reduction program (quantitative tightening), with a monthly cap of $60 billion in Treasury securities and $35 billion of agency mortgage-backed securities.

Following the September meeting, the Federal Open Market Committee (FOMC) released its updated Summary of Economic Projections. The median projection for the federal funds rate at the end of 2023 was unchanged, but the projection for year-end 2024 was revised to a range of 5.0% to 5.25% compared to 4.5% to 4.75% following the June FOMC meeting, signaling the Fed’s desire to retain higher-for-longer policy rates. The updated economic projections suggest a growing consensus among the FOMC for an economic soft-landing as annual GDP growth forecasts were revised higher, projections for unemployment lowered and core PCE inflation was left largely unchanged. The revised projections appear to reflect a best-case scenario, suggesting inflation can decline toward the Fed’s 2% target without a meaningful slowdown in growth or deterioration in unemployment.

Fiscal Policy – Government spending is projected to add to U.S. GDP in 2023 as the current fiscal-year spending bill includes increases in domestic initiatives and defense programs. Recent legislative actions suggest government spending will have a modest dampening effect on economic growth starting in 2024. The debt ceiling agreement in June keeps non-defense discretionary spending flat in 2024 while capping growth at 1% in 2025. With defense spending set to increase about 3% in 2024, these levels imply a reduction in real spending over the next two years. Further, Congress narrowly averted a government shutdown at the end of September by passing a 45-day continuing resolution. The resolution maintains current spending levels as Congress negotiates a new annual budget, but Congressional Republicans have voiced demands for spending cuts next year to avoid a government shutdown. Looking beyond the immediate concerns, the Infrastructure and Jobs Act (2021) and Inflation Reduction Act (2022) will boost government spending over the long-term, but near-term impacts are likely to be minor. State and local government finances are starting to diverge, with municipal entities more dependent on sales and property taxes faring better than those relying on income taxes, but strong reserves have left the overall sector in a solid position should economic conditions weaken further.

Credit Markets – With markets converging toward the Fed’s higher-for-longer guidance, yield curve levels rose meaningfully, particularly on the longer-end of the yield curve. Despite the jump in rates and elevated market volatility, credit spreads ended the quarter relatively in line with the close of Q2. As a result, credit outperformed Treasuries on incremental coupon income. Higher market yields drove absolute portfolio returns and provided a cushion against negative price action from higher rates. Corporate and ABS new issue markets were reasonably active in the quarter and continue to offer concessions to secondary market opportunities. Secondary market liquidity remained solid in the quarter. 

Yield Curve Shift

U.S. Treasury Curve

Yield Curve


Yield Curve




3 Month




1 Year




2 Year




3 Year




5 Year




10 Year





Duration Relative Performance

*Duration estimate is as of 9/30/2023

Despite the jump in yield curve levels, absolute returns for short and longer-duration Treasury indexes were positive. The three-month to five-year portion steepened by 29.2 bps as longer-end yields rose more than short-term yields. As expected, shorter duration Treasury strategies outperformed longer strategies.   

Credit Spread Changes

ICE BofA Index

OAS* (bps)


OAS* (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




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.

Despite meaningfully higher yield curve levels and overall market volatility, overall credit spreads ended the quarter in a tight band of 4-6 bps to end of Q2 levels. As a result, coupon income was the key driver of performance differentials among asset classes. AAA-rated ABS also performed well in the quarter and continue to offer yields in line with single-A corporate debt.

Credit Sector Relative Performance of ICE BofA Indexes

ICE BofA Index

*AAA-A Corporate index outperformed the Treasury index by 2.6 bps.

*AAA-A Corporate index underperformed the BBB Corporate index by 25.5 bps

*U.S. Financials outperformed U.S. Non-Financials by 23.3 bps

Credit, agencies and ABS outperformed comparable duration Treasuries in the quarter, primarily on incremental coupon income as overall spreads remained reasonably stable. U.S. financials meaningfully outperformed non-financial corporate debt as concerns over bank funding continue to ebb since March.   

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

The third quarter of 2023 ended with the FOMC on hold and entering the final leg of its inflation-fighting campaign. The Fed raised rates 25 bps to a range of 5.25% to 5.50% at the July 14 meeting and paused again in September. The committee remained hawkish in its commentary while futures are pricing in close to a 40% probably of one more 25 bps move this cycle. The challenge for managers going forward is determining how the economy and inflation will warrant the elevated rates.

Money market fund assets continued to increase during the quarter as elevated money market yields attracted investors. With the Fed fully focused on price stability for the foreseeable future, money market funds remain an attractive investment option for fixed income investors. 

First American Prime Obligations Funds

Credit conditions and trading ranges appear stable given the current rate and geopolitical environment. Considering the yield curve and a conservative cash flow approach, the First American Funds were positioned with strong portfolio liquidity metrics influenced by Fund shareholder makeup. We continued to employ a heightened credit outlook, maintaining positions presenting minimal credit risk to the Fund’s investors. During the third quarter, our main investment objective was to maintain liquidity while opportunistically enhancing portfolio yield based on our economic, credit and interest rate outlook, along with considerations of investor cash flows. We believe the credit environment and higher relative fund yields make the sector an appropriate short-term option for investors.

First American Government and Treasury Funds

Treasury bill/note supply continued to expand as the U.S. Treasury replenished the Treasury General Account, post-debt ceiling, and the Fed continued quantitative tightening. The tapering pace of rate increases coupled with additional bill supply presented some beneficial investment opportunities for Fund shareholders, which was reflected in a modest extension of portfolio durations. When presented with appropriate value, we also purchased floating-rate investments designed to benefit shareholders over the securities holding period. Our investment strategy will be fluid in the coming quarters as markets make determinations on the Fed’s comfort level with its inflation fight, and ultimately the terminal Fed funds rate. 

First American Retail Tax Free Obligations Fund

A slowdown in the pace of interest rate increases from the Federal Reserve has done little to reduce the volatility in the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index. The resets for these seven-day, tax-exempt variable rate demand notes in Q3 ranged from a low of 2.20% to a high of almost 4.50%. Heavy reinvestment from municipal bond maturities and coupon payments pushed SIFMA lower during July and August. However, the downturn in rates was short-lived as tax-free money fund redemptions followed. Broker-dealers continue to struggle with setting an equilibrium rate that keeps these securities outstanding and off their own books. The higher rate environment and gap between taxable and tax-exempt rate, has made this task more difficult, as it requires larger adjustments when inventories rise. We continue to hold 15% to 20% allocations to fixed-rate commercial paper and notes to reduce the impacts of these swings on the Fund’s overall income. 

What near-term considerations will affect fund management?

Industry-wide, we believe prime fund yields are likely to increase as managers roll maturities into higher yielding securities, and in the event the Fed increases rates, floaters reset in step with any remaining rate increases. Front-end yields in credit securities may benefit from the overall supply increase in Treasuries, as there will be competition among issuers for the marginal dollar. Based on our market outlook and breakeven analysis, we will seek to capitalize on investment opportunities that make economic sense. The Institutional and Retail Prime Obligations Funds should remain reasonable short-term investment options for investors seeking higher yields on cash positions while assuming minimal credit risk.

Yields in the government-sponsored enterprise (GSE) and Treasury space will remain influenced by Fed policy and Treasury bill/note supply. With front-end yields elevated and the Fed still wary of inflation, we expect the investment environment for government money market funds to remain attractive. As with non-government debt, in the coming quarter, government yields should increase in step with any Fed rate increases. We anticipate some yield dislocations in Treasury and GSE issues as the influx of bill supply and continued quantitative tightening increase returns as bonds look for a home away from dealer balance sheets. Any large supply changes in Treasury issuance may create yield volatility/opportunity on the front end as the forces of supply and demand seek optimization. Investors may also decide to opportunistically invest in term securities as markets attempt to solve the “terminal rate” and “higher-for-longer” equation. We will continue to seek value in all asset classes and exploit market conditions that support domestic and global economic outlooks.

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Bloomberg C1A0, CY11, CY21, CY31, G1P0, ICE Bond, JOLTTOTL, NFP TCH, PCE CYOY, US0003M, USUETOT and USURTOT Indices

Bloomberg, U.S. Economic Forecast

Bloomberg, U.S. Treasury Actives Curve

Federal Reserve Press Release, September 20, 2023

Federal Reserve, Summary of Economic Projections, September 20, 2023

Wall Street Journal, "What's in the Debt-Ceiling Deal", David Harrison and Kristina Peterson, May 31, 2023