BlackRock recently posted a commentary entitled, "The Credit Crisis: U.S. Government Actions and Implications for Cash Investors. The 4th largest money fund manager's "Re-Cap of Market Events and Government Response" includes a timeline of events over the past two months and a review of the various steps taken by the Treasury, the Federal Reserve and the U.S. Government to stabilize money markets and to protect money market funds.
BlackRock writes, "From the first headlines in early 2007 regarding the burgeoning subprime crisis in the United States to the near collapse of global financial markets, cash investing has undergone extreme change. What was once taken for granted is now a source of considerable anxiety, and governments around the world have been compelled to introduce programs designed to promote liquidity and stability in the fear-frozen short-term debt markets."
The piece briefly reviews the tumultuous events of the past, and discusses the government support actions taken to date. These include: the Treasury's Temporary Guarantee Program for Money Market Funds, the Fed's Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Congress's Troubled Asset Relief Program (TARP), Federal Deposit Insurance Corporation Activity, the Commercial Paper Funding Facility (CPFF), and the pending Money Market Investor Funding Facility (MMIFF).
The publication asks, "What Should Cash Investors Do? BlackRock says, "One clear lesson from recent credit market events is that despite investors' historical experience, cash investing is not a low-risk activity, particularly in the context of the absolute requirements of capital preservation and liquidity. Now is a good time to examine your approach to cash management to ensure that it is meeting your needs and risk tolerance." They also suggest, "Review cash flows and liquidity needs. In an environment of higher volatility and less secondary liquidity, investors should make every effort to ensure the accuracy of their cash flow expectations."
They also advice, "Don't take liquidity for granted. A renewed appreciation for liquidity should be one of the most valuable takeaways from this crisis. Investors can sometimes mistake a first-tier rating for a guarantee of liquidity. The rating agencies' A1/P1 ratings indicate their belief that these issues are 'money good', meaning that investors can expect to receive the face value of the security at maturity. However, that doesn't ensure that the instruments trade at par value day in day out -- or, in fact, that they trade at all -- which can make it difficult or impossible for investors to address their immediate cash needs."
Finally, they say, "Risk aversion is not risk management. While a flight to quality is understandable in this volatile environment, it is possible to overreact and miss attractive investment opportunities. There is little reason other than fear to have core or strategic cash in overnight Treasuries. Your manager should help you find an appropriate course of action given the advantages certain securities now offer due to the government's intervention. For example, debt issued by Fannie Mae and Freddie Mac, while now offering 100% commitment from the U.S. government, can provide better yields than short-term Treasuries, as can the guaranteed bank debt described earlier. Ginnie Mae also continues to offer yields above Treasuries with no issuer risk."
BlackRock adds, "The events of recent months have not inspired a reevaluation of our methods for managing this vital asset class; rather, they have reinforced our commitment to the approach we have employed for more than 30 years. The markets may change, as may our tactics or strategies, but our core values will not."
