JPMAM's Du Plessis on Euro MMFs
J.P. Morgan Asset Management writes on European Euro-denominated money market funds in "ECB fuelled by uncertainty." Portfolio Manager Johan Du Plessis writes, "The Governing Council voted unanimously to raise all three key ECB interest rates by 25 bps, bringing the deposit facility rate to 2.50%, a level widely perceived to sit at the upper end of the neutral policy rate range. The accompanying statement left little doubt about what is driving the decision: persistent inflationary pressure stemming from the Middle East conflict, with prices expected to remain above target for an extended period. President Lagarde added important colour during the press conference, clarifying that inflation is unlikely to return to target before the second half of 2027 a timeline that will focus minds." He tells us, "While the September decision to raise rates was described by Largarde in the press conference as a 'no-brainer', any move to increase rates from here should face a higher bar, given this will start to move rates into more restrictive territory. Faced with a highly uncertain outlook, the ECB are wise to retain full optionality around future policy decisions. The lack of resolution to the Middle East conflict has moved spot energy prices closer to the ECB's adverse scenario. The longer this situation persists, then the more likely the ECB will be to follow up with further hikes. Market pricing for the terminal ECB rate remains highly correlated with energy prices, and will likely remain volatile until a lasting resolution to the conflict is found. With an additional 75bps of further hikes and a terminal rate of 3.25%, we feel this is looking a little overdone." The PM adds, "The deposit rate increase takes effect on 16 September when the yield on the EUR Low Volatility Net Asset Value (LVNAV) strategy is expected to increase by around 10 basis points. This reflects higher returns on overnight reverse repo and time deposits, as well as the contribution from floating rate assets held in the strategy. With markets remaining volatile, the strategy remains focused on active duration management. Given the steepness of the money market yield curve and market pricing that is elevated relative to our expectations, we will look for opportunities to lock in higher yields through term investments. At the same time, we will continue to size trades conservatively and average into positions over time. We also maintain exposure to floating-rate instruments, which can help hedge against faster-than-expected rate increases. Finally, we retain a high-liquidity profile, enabling us to reinvest efficiently as market rates evolve." (Note: JPMAM's Du Plessis will be speaking on the "Senior PM Perspectives panel at our European Money Fund Symposium, which is Sept. 24-25 in Paris.)
