SSGA's Playbook for New Cash World
State Street Global Advisors released white paper last week entitled, "2016 Cash Outlook, A Playbook for the New Cash World." The piece says, "2016 will be a watershed year for cash management. New rules and market developments continue to dramatically reshape the short-end market. SSGA is urging investors to consider reviewing their cash allocations and adapting to the new realities as soon as possible -- well before the implementation deadlines.... These developments -- coupled with Fed tightening and yield spreads that are poised to expand -- mean cash management decisions are more important than ever in determining priorities for liquidity vs. yield.... Given the seismic shifts in so many stalwart cash strategies -- money market funds, repos, commercial paper and even wholesale bank deposits — playing by the old rules is no longer the best option." SSGA's paper continues, "By October 14, 2016, every institutional prime and institutional municipal MMF will be valued at a floating (or variable) NAV, rather than the fixed $1 per share that they have long used.... Because this change doesn't apply to government MMFs, many investors -- accustomed to the convenience and security of the fixed NAV -- are expected to move cash into government MMFs. If this happens, yield spreads are likely to expand. In SSGA's view, there are compelling reasons to look beyond government funds, particularly for cash not needed for near-term operations. State Street funds that will still feature a fixed NAV include the Institutional US Treasury Fund (TRIXX), US Treasury Fund (SVTXX), and Institutional US Government Fund (GVMXX). In addition to the government MMFs, State Street is offering new money fund options [sic] that don't conform with Rule 2a-7, and therefore are not subject to redemption gates and liquidity fees. These include the Current Yield Fund (SSYDX), Conservative Income Fund (SSKGX) and Ultra Short Term Bond Fund (SSTUX)." Furthermore, the paper says, "These changes will drive many investors out of institutional prime and muni funds and into government funds. This flood of cash will position government funds to satisfy two of the criteria for optimal cash management -- security and liquidity -- but will likely drive yields down, particularly while interest rates remain low and the shortage persists in securities underlying government MMFs. On the flipside, as funds flow out of the floating NAV prime funds, yield spreads are poised to increase, rewarding investors able to accept marginally higher risk." It continues, "SSGA has long urged clients to partition cash amongst operational, core and strategic segments, and optimize each with investments featuring an appropriate balance of liquidity, security and yield. Under the new cash rules, this is more imperative than ever, particularly with new rules that will impose a variable NAV on institutional prime strategies and the potential for gates and fees on all prime MMF strategies. Moreover, spread gaps between Treasury bills and prime money market funds could rise to as much as 20 to 50 bps. For most investors, the days when a single investment fit all of your needs are coming to an end." The paper concludes by detailing the funds that might fall into the three buckets" Operational funds include Treasury and Government funds, as well as SSGA's new 60-day maximum maturity fund; Core funds would include SSGAs prime funds and the new Current Yield fund; and, Strategic funds include the new Ultra-Short Bond and Conservative Income funds, as well as SMAs.
