Treasury Strategies hosted its Quarterly Corporate Cash Briefing yesterday, where the discussion among panelists Roger Merritt, Managing Director, Fitch Ratings; Debbie Cunningham, CIO, Global Money Markets, Federated Investors; and Peter Matza, Engagement Director, Association of Corporate Treasurers, focused on liquidity -- or lack thereof -- in the marketplace, as well as the impact of Fed policy. The webinar was moderated by Tony Carfang, Partner, Treasury Strategies, and also featured Kevin Ruiz, Principal, Treasury Strategies. We also cover the release of the Minutes from the September meeting of the Federal Reserve's Federal Open Market Committee, where, despite much speculation to the contrary, the Fed did not raise interest rates. (Note: Charles Schwab just announced changes to its money funds this morning. Watch for a full update shortly.)
The Quarterly Cash Briefing <i:https://www.youtube.com/watch?v=o-DG3jKEitk&feature=youtu.be&list=PLgADTI06-0lU2VZhDCFGVN1co5NsWNmkV>_ panelists talked about liquidity shifts in the market. Merritt explained, "`We've seen tremendous structural changes in the markets since the financial crisis ... in no small part driven by regulations. One of the concerns that we have and that the market is focused on is whether these structural changes have resulted in markets that are fundamentally less liquid. That obviously has implications for anybody who's trying to manage cash or who is regularly trying to access to capital markets."
He continued, "We did a survey last year of select asset managers and one of the questions we asked was, 'Are the markets less liquid?' The answer was almost uniformly yes. So I think one of the concerns is, 'Where is the liquidity coming from today?' It seems that increasingly it's coming from the asset management industry itself. The assets held in bond funds have grown five-fold since 2009, so the concern there is -- Do these managers have the intrinsic liquidity to manage a period of outflows? We've done research that shows that flows are strongly correlated to returns, and we've also seen that there's a high correlation between the size of a bond issue and its liquidity. Are we going to see greater volatility going forward than we have in the past? It remains to be seen. But I think in certain segments of the credit market the answer may be 'Yes.'"
Cunningham commented on the changes she's seeing. "The bond markets have historically been less liquid than the equity markets -- it's historically a buy and hold asset class compared to equities. Having said that, I think today's market from a bond perspective, versus historically, probably isn't all that much less liquid -- it's just whose making the liquidity. Broker dealers, who have historically held inventory and made markets are not as willing to do so today because of concerns they have about what their own balance sheet might looks like. So I think the market makers are less prone to be active in the marketplace. Certainly, it's an aspect of the market that we will continue to monitor."
On Fed policy, Merritt said, "It would be hard to argue that that there aren't distortions in the marketplace because of the Feds long 0% interest rate policy. We are in uncharted territory. We've had zero interest rate policy in place for nearly seven years -- that's really quite unprecedented. It's hard to know how the markets will ultimately re-price once we start to see the Fed raise rates to more normal levels."
In other news, the Federal Reserve released the Minutes from its Sept. 16-17 FOMC Meeting, detailing its decision not to raise interest rates. The minutes said, "Inflation continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.... Participants weighed a number of risks associated with the timing of policy firming. Some participants were concerned that the downside risks to inflation could be realized if the target range for the federal funds rate was increased before it was clear that economic growth would remain at an above-trend pace and downward pressures on inflation had abated."
It continues, "Some other participants, however, expressed concerns about delaying the start of normalizing the target range for the federal funds rate much longer. For example, a significant delay risked an undesired buildup of inflationary pressures or economic and financial imbalances that would be costly to unwind and that eventually could have adverse consequences for economic growth. In addition, a prompt decision to firm policy could provide a signal of confidence in the strength of the U.S. economy that might spur rather than restrain economic activity. These participants preferred to begin policy firming soon, with most of them expecting that beginning the process before long would allow the target range for the federal funds rate to be increased gradually."
The Wall Street Journal covered the minutes in its story, "Fed's Rate Delay Spurred by Worry Over Low Inflation, Minutes Show." The story says, "Some Fed officials have described the September decision as a close call. The minutes don't suggest there was intense disagreement with the decision to hold off on raising rates."
In her regular "Month in Cash" column, Federated's Debbie Cunningham, wrote a post called, "The Fed Has No Cred." She says, "When the Federal Reserve decided to leave rates near zero in its September policymaking meeting, it was more than disappointing. It struck a serious blow for its credibility. While the Fed can't and shouldn't make promises, it has been giving strong indications in its economic projections and in most speeches that the economy is finally conducive to a hike. Our view of Chair Janet Yellen and company is now a case of "watch what they do, not what they say." The markets have lost some faith, too."
She adds, "So where does it put us and most money market managers? Pretty much right where we were ahead of the September meeting. We will continue to position ourselves for the Federal Open Market Committee (FOMC) to announce a move this month or in December, but we won't be surprised if there isn't one this year." (Correction: Please note that yesterday's News and our latest Money Fund Intelligence and MFI XLS contained an incorrect asset number for Vanguard Prime MMF Inst. We had reported a large drop in assets, but this fund was actually flat in Sept. Note that we've since revised the story and the online versions of MFI and MFI XLS.)
