Public cash managers today face a strategic dilemma: They can sit on money market funds, local government investment pools and ultra-short investments like repurchase agreements, all of them still yielding the highest interest rates available today. Or they can look out into 2025 and try to lock in some less spectacular but still healthy longer-term yields in anticipation of lower short-term rates next year, if and when the Federal Reserve cuts its overnight rates on the view that inflation has been tamed. The problem today is that markets have already begun to anticipate a lower-rate environment next year, and thus longer maturities currently carry lower yields. The “give up” trade is hard to explain to those who cannot see beyond their noses. There is more than just the egos of state and local treasurers at stake. Budget officials need accurate projections of interest income from operating funds, and some may even prod their treasurers to lock in rates now to prevent a sharp drop-off in interest income next year. Already, it looks like general fund interest income revenues in 2025 could be down 10 to 15 percent, and it may be even worse where cash reserves and federal grants are being spent this year. Meanwhile, debt managers need to decide when is the best time to sell municipal notes and bonds for both cash flow and capital improvements. With trillions of public-sector budget dollars invested in the money markets and interest income again representing a significant revenue line item, these are not Source: Governing
