Quarterly Portfolio Manager Commentary

June 30, 2023

The auditor hand holding pen and budget graph document to examine the misuse of company funds


First American Money Market Funds

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

Economic Activity – U.S. economic activity moderated during the second quarter (Q2), but the economy continues to show surprising strength and resiliency in the face of aggressive Federal Reserve (Fed) monetary policy tightening. U.S. Gross Domestic Product (GDP) growth is projected near 1.8% for Q2, led by robust employment gains and solid consumer spending and comparable to the first quarter’s 2.0% tempo. Consumption grew at a modest pace in Q2 as U.S. consumers continue to benefit from a tight labor market and solid balance sheets, supporting resilience to persistent inflation and tightening financial conditions. Despite signs of gradual easing, employment conditions remain quite firm with May U.S. job openings standing at 9.8 million open positions versus total unemployed workers in the labor force of 5.9 million. Monthly Non-farm Payrolls (NFP) growth has cooled but remains strong, averaging 244,000 during Q2, and the U3 Unemployment Rate was 3.6% in June. Growth in Average Hourly Earnings remains elevated at 4.4% year-over-year (YoY), further emphasizing strong labor demand. Inflation pressures eased throughout the quarter with the headline Consumer Price Index (CPI) declining meaningfully to 3.0% in June (5.0% in March) and CPI ex. food and energy rising 4.8% YoY for June compared to 5.6% YoY in March. The Fed’s preferred inflation index – the PCE Core Deflator Index – increased 4.6% YoY for May. Falling energy prices have driven the sharp decline in headline inflation during the first half of 2023 but core inflation has proven stickier than expected due to persistent core services price pressures. While the recent decline in core inflation is encouraging, it remains too high and economic activity hasn’t slowed enough to give the Fed confidence inflation is on a sustained downward trend.

Monetary Policy – The Fed further tightened monetary policy during the quarter, raising the federal funds rate by 25 basis points (bps) at the May 3 meeting to a target range of 5.0% to 5.25%. The Fed elected to keep rates unchanged at its June 14 meeting, however, as they continue to moderate the pace of tightening and access lagged impacts of prior rate increases. 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 June meeting, the Federal Open Market Committee (FOMC) released its updated Summary of Economic Projections which suggest the Fed is retaining a tightening bias despite the June pause. The median projection for the federal funds rate at the end of 2023 was increased to a range of 5.5% to 5.75%, signaling expectations for two additional rate hikes this year. Revisions to economic projections also reflect stronger-than-expected growth this year as the FOMC lowered its year-end 2023 median forecast for unemployment to 4.1% from 4.5% and upgraded its forecast for annual GDP growth to 1.0% from 0.4%. In a sign that tighter monetary policy is having a limited impact on demand thus far, the Fed also boosted its year-end median forecast for core PCE inflation to 3.9% from 3.6%. The Fed continues to anticipate maintaining restrictive rate policies into 2024 to ease labor market conditions and bring inflation down toward its 2% target.

Fiscal Policy – Government spending was a drag on U.S. GDP in 2022, but this is set to change in 2023 following the late December passage of a $1.7 trillion spending bill for fiscal year 2023. The bill includes a 6% increase in spending for domestic initiatives and a 10% increase in defense programs. A split government and the near-term need to extend the debt ceiling and pass a federal budget makes the likelihood of another significant fiscal package unlikely over the next two years. On the municipal side, state and local governments have seen early signs of tax collections starting to slow, but strong reserves have left them in a solid position if economic conditions weaken further.

Credit Markets – Credit markets improved in the quarter, with corporate and ABS spreads tightening on stronger investor demand for risk and yield following the financial market stress sparked by bank failures in March. Yield curve levels rose as the potential for additional Fed rate hikes became more widely accepted in the market. The corporate and ABS new issue markets were reasonably active in the quarter and continue to offer concessions to secondary market opportunities. Secondary market liquidity was 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 6/30/2023

The jump in yield curve levels pushed absolute returns for longer-duration treasury indexes into negative territory. The three-month to five-year portion remained inverted by approximately 112 bps, highlighting the positive carry of investing in short-term treasuries versus locking in current levels out the yield curve.  

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.

A-rated and BBB-rated corporate credit spreads tightened in the quarter, leading to general outperformance versus higher-quality counterparts. 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 49.7 bps.

*AAA-A Corporate index underperformed the BBB Corporate index by 56.0 bps

*U.S. Financials outperformed U.S. Non-Financials by 63.5 bps

Credit outperformed comparable duration treasuries in the quarter on incremental coupon income and tighter credit spreads. BBB rated credit outperformed higher quality debt, reflecting the increased risk appetite of investors as markets recovered from March’s financial system stress. Not surprisingly, U.S. financials meaningfully outperformed non-financial corporate debt. 

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

The second quarter of 2023 ended with a sense of calm as regional U.S. bank failures were in the rearview mirror, the U.S. debt ceiling had been raised, and the FOMC appeared to be entering the final leg of its inflation-fighting campaign. The Fed paused at the June 14 meeting, leaving rates at 5.00% to 5.25%. However, while the Fed left rates unchanged, their statements prepared the market for some additional rate hikes later this year and set the table for a higher for longer yield environment.

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 spreads in the money market space have tightened modestly as market confidence recovered following the regional bank crisis. 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 (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 second 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 and supply began to loosen as the U.S. Treasury replenished the Treasury General Account, post debt ceiling, and the Fed continued quantitative tightening. The tapered 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 duration(s). When presented with appropriate value, we 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 determine the Fed’s comfort level with its inflation fight and ultimately the terminal federal funds rate.     

First American Retail Tax Free Obligations Fund

We wrote extensively about the sharp weekly adjustments to the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index (a measure of 7-day, tax-exempt variable rate demand notes) in last quarter’s commentary, and this volatility persisted in Q2. Broker/dealers navigated tax season, another Fed rate hike, heavy reinvestment from municipal bond maturities and coupon payments received in June, and the typical pressures to reduce inventories ahead of quarter-end, in search of the right clearing level. Although overall municipal bond new issuance has been on the lighter side relative to 2022, at times clusters of these fixed-rate settlement dates also seem to have influenced variable rate demand notes (VRDN) inventories to some extent. The Fund continues to have a 15% to 20% allocation to tax-exempt commercial paper. We believe these fixed-rate investments are useful in lessening the impact of the VRDN fluctuations on the overall Fund yield.                  

What near-term considerations will affect fund management?

In the coming quarter, we anticipate money market fund yields to rise in step with Fed rate increases as they taper the rate hiking phase of their inflation-fighting campaign. We also anticipate adjusting yields on non-government securities in step with forecasted and realized Fed funds rate increases. Industry-wide, prime fund yields should increase as managers roll maturities into higher-yielding securities and floaters reset in step with remaining rate increases. 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 the non-government debt, in the coming quarter, government yields will increase with Fed rate increases. We do anticipate some yield dislocations in Treasury and GSE issues as the influx of bill supply (a hangover from the debt ceiling) and continued quantitative tightening increase yields as bonds look for a home away from dealer balance sheets. Any large supply changes in Treasury issuance may create yield volatility on the front end as the forces of supply and demand seek optimization. We will continue to seek value in all asset classes and indexes, incorporating all domestic and global economic market data.

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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, June 14, 2023

Federal Reserve, Summary of Economic Projections, June 14, 2023

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