Cunningham: MMFs Staying Steady
Federated Hermes' latest monthly insight, titled, "Staying steady," is subtitled, "The stability of the money markets is shining amid the greater financial turbulence." Author Deborah Cunningham writes, "The impact of Trump's 'Liberation Day' tariffs -- and the subsequent changes and recent delay -- on the broad financial market has been seismic ... but not necessarily for the liquidity space. The tariffs, which have caused massive equity and bond volatility, have not had the same effect on the money markets, which are relatively steady amid the turbulence. We presume some inflows are due to a flight to quality -- hot money that might soon be deployed in depressed stocks. But some retail investor purchases will likely stay put as we believe they are attracted by the yields of liquidity products. We deal with only banks of the highest quality, all of which in our analysis appear to have ample reserves and excellent credit metrics, and we see continued health in those markets." She continues, "A more significant 'named' date for most Americans is the dreaded Tax Day, which is almost upon us. The focus, of course, is on individuals and corporations, but it also affects asset managers. Money market vehicles traditionally see net outflows as people and entities redeem shares to meet their obligations. Portfolio managers must decide how much liquidity is needed to accommodate this. It's a complex, but familiar territory for the cash business. Despite that other government-imposed complication -- not raising the debt limit -- that process is going smoothly." Cunningham adds, "The Federal Reserve remains the government entity with the most impact on the money markets. It is focused on the extent to which Trump's sweeping tariffs, whatever form they end up taking, change the course of employment and inflation. Policymakers likely will cut if the former weakens but pause -- or at least ease at a slower pace -- if the latter rises. Either way, it's not yet time to react to the levies that are whipsawing every day. However, with volatility comes opportunity, as we can maintain our weighted average maturities to continue to benefit from the higher-for-longer environment."
