Treasurers.org: Money Funds in Focus
Treasurers.org recently published the article, "Liquidity outlook: money market funds in focus," which is subtitled, "MMFs will remain popular in 2025, offering yield and liquidity but credit processes must remain rigorous, according to Aviva Investors' Alastair Sewell." It states, "In an increasingly varied macro-economic environment, cash management is as important as ever. Many corporate treasurers use money market funds (MMFs, also known as liquidity funds) as a tool for managing their cash. MMFs aim to preserve capital, provide on-demand liquidity and deliver a competitive yield. But what can we expect from MMFs in 2025? While central bank rates -- and hence liquidity fund yields -- may not match the highs of 2024, we still expect levels of cash income to be healthy in 2025 and certainly well above the lows of the 2010s. 'Step-out' strategies, such as 'standard' MMFs and ultra-short bond funds, could be useful tools this year to help investors achieve higher overall blended yields while maintaining good levels of liquidity." Sewell comments, "Liquidity fund managers always seek to manage liquidity levels prudently, so they can deliver on their objective of providing timely liquidity. Even with flows being broadly positive during 2024, liquidity funds generally maintained high levels of liquidity, well above regulatory minima. But despite these levels of prudence, US authorities increased minimum liquidity requirements for US funds and the UK proposed increases, too. Whether Europe follows suit remains to be seen." The article continues, "Most major central banks are in a rate-cutting mode. The key challenge for liquidity fund portfolio managers will be in predicting the timing and magnitude of future rate changes and hence the relative value of securities with different maturities. In other words, it's all going to be about the shape of the short-term yield curve. Looking at 2025, market participants have adjusted their expectations. Median forecasts from economists do, however, still point to cuts ahead, with inflation developments representing a key factor in the outlook. The more fundamental point is that there is no current indication of rates falling back to the ultra-low levels of the 2010s. With inflation falling, and below central bank base rates, the yields on liquidity funds should be positive in real terms." It adds, "There are options for those investors seeking to generate higher yields in a declining rate environment. For investors unwilling to step outside the regulated liquidity fund perimeter, 'standard' MMFs can be an option. These operate with longer weighted average maturities than 'short-term' MMFs, and can therefore generate potentially higher yields, especially as rates fall. Short-term bond funds come in many shapes and sizes. Many will have material allocations to short-dated corporate bonds, potentially rated in the 'BBB' category. We believe there are assets with more stable profiles available that can deliver incrementally higher yields." Finally, Sewell writes, "We think it highly likely the European Commission (EC) will put forward proposals to change the MMF regulation in 2025. There are two key topics we expect to be raised. First, 'delinking' or a removal of the link between weekly liquid assets and the potential imposition of liquidity fees and gates. The EC has already indicated it is minded to remove this link as it proved to have unintended consequences. That's a positive. Second, 'increased liquidity requirements'. The US Securities and Exchange Commission mandated higher liquidity levels and the FCA in the UK has called for it. While the EC has stated that current levels are adequate, we see pressure from multiple quarters to demand more. This should make liquidity funds safer, but then again, the evidence shows that even in severe scenarios current liquidity levels have proven adequate to date. More fundamentally, it could reduce the yield liquidity funds can generate."
