MMFs Anchored for Brexit
Federated Investors released its latest "Month in Cash" commentary entitled, "Money funds anchored during Brexit." Federated's Deborah Cunningham writes, "Of all the nautical slang that has stuck around from the days when Britain ruled the high seas, "Keeping an even keel" most describes how money markets reacted to the shock of Brexit. The Leave vote caused tremendous volatility in the equity markets -- plenty of investors abandoning ship -- but didn't produce unusual flows or activity for cash managers. Our dollar and sterling products have behaved normally. It is, of course, often the case that volatility drives investors and brokers to take money out of equities and into money funds, but that didn't happen in any meaningful way after the unexpected outcome of the referendum. In fact, one way of judging the severity of a financial upheaval is the volume of flows into money funds. The greater the amount, the more serious the panic. So it was no surprise to us that equities rallied only a few days after they plunged in the immediate aftermath of the announcement that the U.K will leave the European Union. Actually, much of the activity since that announcement can be attributed to the run-up to quarter-end, with its typical reduced supply and higher rates. To be sure, overnight rates were elevated on Friday in part because banks were willing to make repo transactions early in the process due to Brexit. Everyone wanted to make sure they were funded rather than shopping around for few more basis points. For banks, the winning path for liquidity has traditionally been not to hesitate in obtaining repo capital when there is turmoil and uncertainty, and that was the track most banks took. But liquidity was never an issue -- even participation in the reverse repo facility was not out of the norm. After the shock of the referendum began to dissipate, typical quarter-end pressures clearly became the dominating factor for rates. The Independence Day holiday weekend is a complication, but operations will likely return to business-as-usual July 5. Also, it is important to keep in mind that the U.K.'s extrication from the EU will be a drawn-out process, probably over two years. Nothing is going to happen quickly. There are several long-term implications of Brexit. Money market funds registered in the U.K. will have to review the situation, but the vast majority are not domiciled there. As is the case with most firms, we will closely monitor and frequently assess the credit of U.K. banks, which we use and will continue to use. If it looks like the world is renegotiating in a way that's problematic for them, we will take that into account as we update our credit views. Then there's the Federal Reserve. Cash managers would love this to be a medium-term and not a long-term issue. The outlook before the British vote was for a September move, and the London interbank offered rate (Libor) reflected that. But the shock of the Leave vote sunk that chance and pushed Libor down. We have not changed our Weighted Average Maturity (WAM) target ranges and have found value in some longer-dated fixed pieces. However, we think a rate hike is not off the table for 2016, just that the bar has been raised considerably. If the U.S. labor market returns to its recent strength and other economic data impresses, the Fed could well navigate through the headwinds." See also, Financial News' "Brexit raises money market worry for pensions"."
