Last Thursday, Treasury Strategies held its latest "Quarterly Corporate Cash Briefing," hosted by Treasury Strategies' Kevin Ruiz and Anthony Carfang, and featuring Deborah Cunningham from Federated Investors, Gregory Fayvilevich from Fitch Ratings, Michelle Price from the Association of Corporate Treasurers. The invitation for the session, entitled, "Managing Corporate Cash – More Critical Than Ever," explained, "The one thing 2017 has not been is boring. We have seen drastic political and economic changes worldwide, yet global financial markets seem to be humming along. What more is in store for us in 2017? Please join us in the largest and longest-running conversation on corporate cash decisions in the financial industry." We quote from some of the highlights below.
Carfang commented, "As we look at the numbers here at Treasury Strategies, we help our clients decipher what's going on in the marketplace. I can't help but think that the decline in reserve balances -- these are reserves that banks keep on deposit [at the Fed earning IOER, interest on excess reserves] -- have declined from a 2013-2014 period high.... It's interesting that we see the slope of that decline accelerating. `But when we look at this [decline], we actually see a similar pattern to the outflow of assets from prime money market funds."
He continued, "If we go back and check the statistics, [the reduction in] money fund holdings of bank liabilities totaled about $600 billion dollars, and the [decline in Fed reserves is] almost identical.... As banks lost funding from money funds, it actually made up that funding by withdrawing their reserve deposits from the Fed. If that's true, there would be a lot of implications.... Frankly, we're not sure, [but] we have a decline in reserve balances."
Carfang also discussed the new regulatory environment in Washington, saying, "Does that mean that money fund regulations will get rolled back in the new Congress or with the new composition at the Securities and Exchange Commission? ... That depends on you.... The regulated seem to at some point, accommodate and adapt to [new] regulations nicely, and may not be interested in having regulations rolled back. Over the last several years, banks were talking about the need to repeal Dodd Frank, and all of a sudden we have an administration that might repeal Dodd Frank and now some of the banks [aren't interested]."
He added, "The same [thing might be happening] in the money market industry.... Now as corporate treasures, ... what you need to do here is make sure your financial services providers, your banks, your fund companies, your investment banks ... understand what you need from the financial system and how financial regulation and regulatory changes have impacted you.... A lot of what we're hearing about regulatory reform will fall by the wayside because of what I referred to as regulatory capture."
Cunningham said on the call, "I think that the political risk, from a money market perspective, it's U.S.-centric, to a large degree. We've got so much change that's occurring here in the U.S. from a political perspective. The fact that we might have fiscal policy [or] stimulus to go along with what has been only monetary policy ... I think that's throwing a lot of what's happening in the U.S., from a money markets perspective and the treasury perspective, into a little bit of a funk."
Fayvilevich discussed MMF Reforms, stating, "The key point to remember about the reform is how ... more than a trillion dollars moved from prime funds to government funds. A lot of it really waited in prime funds ... until the very last minute, and the industry was able to absorb that [shift] very well with no issues. [O]nce institutional prime funds starting floating, and [after] 2 rate hikes NAV's are barely moving, our fund managers are managing liquidity very conservatively. So I think what's important to remember [is] how orderly this whole thing went ... with so much money moving around."
He added, "So prime assets [bottomed out in] early November, and since then we've seen some money come back into prime. We're seeing that in the data.... I think some of the appeal, that I mentioned, [is from] very stable products and strong management. No issues [have come] up since reform. I think that's been one of the big things for investors.... We are six months into the reform already, and investors are getting more comfortable in how prime funds are managed in this environment. Then I think the yield spread between prime and government funds has been fairly attractive for some investors."
Fayvilevich continued, "Yields spreads between prime funds and government funds features have kind of settled around the mid 30's or 30-40 basis points. So we've seen some first movers go back into prime, and I think other investors are getting more and more comfortable with these types of funds. [We] certainly [don't] expect the entire trillion dollars to come back -- some of it was structural and will remain in government -- but I think there's a broad space for [a lot of those dollars] to come back."
He added, "We're also seeing a little move into ultra-short funds. I think investors are doing a better job segmenting their cash, and keeping a little in government funds that needed liquidity, a little bit further out than prime funds maybe a little bit more in ultra-short funds. But ultra-short funds aren't as standardized as prime so a little bit more work is required there."
Cunningham told us, "Trickles are starting to come back in.... From Federated's perspective, our largest institutional prime money market floating net asset value fund ... was up about 30% in assets over the first quarter. That's also [just] a billion dollars.... Part of the problem is the ultimate size of those funds, and how they can be accommodative. Treasurers often times have a minimal investment amount [and] a maximum that they want to be in any one product.... It’s kind of re-working again, investment policies to make tiny footsteps usable and available for the practitioners who are comfortable with it. So it's a hard to get size; it will happen, but it's a slow process."
She continued, "I think the other thing [is] comparing total returns and not just yield. On a first quarter basis, it looked like on a yield spread versus the governments sector it was about a 38 basis points spread. But when you look at it on a total return basis, it was about 36 basis points. [This is] not very much movement, very little 'F' in the 'FNAV' [but] it wouldn't be a full picture unless you look at those components of performance."
