The latest issue of AFP Exchange, the Association of Financial Professional's bimonthly magazine, features an article by Frederick Berretta, Bank of America's head of Global Liquidity Solutions, entitled "Rough Seas: Navigating the Liquidity Maelstrom." The piece says, "Volatility has put liquidity at risk, but thanks to several initiatives, commercial paper and money markets are pulling out of their nosedives."
Berretta reviews the credit crisis and tells readers, "The days of yield chasing are over, at least for the moment. The flight to quality continues, with bank deposits from strong financial providers, treasury securities, and money market funds reaping the benefits. The Fed has launched several tools, such as Money Market Fund Insurance, Commercial Paper Funding Facility (CPFF), Asset Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF) and Money Market Investors Funding Facility (MMIFF) ... to help this particular aspect of the global credit crisis, as the money market is fundamental to the health of the overall economy."
"The good news is that the tools seem to be working: Commercial paper issuance has risen dramatically since the CPFF was launched, and institutional prime money market fund assets are climbing again. The bad news is that we are not sure how these markets will function when these programs expire, and a long-term dosage of them may lead to side effects that we cannot predict. Withdrawal effects may be inevitable," he says.
Berretta gives a number of tips to consider, including, "Avoid overreacting to falling rates." He says, "The embedded and hidden risks of esoteric and highly complex securities have been made manifest.... Understandably, it appears that some investors may even have overreacted by overly conservative, impulsive investing. Complex investments will probably return again in popularity, but when they do, investors will demand greater transparency. It seems that liquidity investing has gone back to an era of simplicity that would seem refreshing, were it not the product of a financial 'perfect storm'."
Finally, Berretta writes in the AFP Exchange article says, "Now is the time to chart a course for your liquidity that will endure when the appetite for capturing those basis points returns. Yield optimization is a worthy cause, but it is probably best pursued in tandem with principal protection."
