State Street Global Advisors published its "Global Cash Outlook 2018" last week, which is subtitled, "Cash Investment Prospects in a Shifting Rate Environment." Global Head of Cash Management Pia McCusker says in the paper's introduction, "As 2018 gets under way, cash investors are likely to see a continuation of the trends that developed through the past year.... For cash investors that have been subject to record low, and even negative, returns in recent years, any upward pressure on short-term rates would be viewed as a welcome development. Once again, it is clear that the US Federal Reserve (Fed) is going to be the pace-setter with three rate hikes penciled in for 2018.... Cash market participants in Europe will be contemplating European money market reform, although most of that reform would largely affect US assets. Cash investors will likely continue to experience frustration as they seek to maintain principal in a negative yield environment."
Following a macro-economic update, the paper addresses regulations, explaining, "Today's cash investor operates in an environment that has seen considerable regulatory change in recent times. Money market fund reform in the United States transformed the US money market landscape when implemented in 2016, and this coming year will see European regulations finally begin to be implemented. Europe's experience will be different from that of the US given their respective starting points, and the contrasting nature of these markets. Specifically, the massive US investor switch from prime funds to government funds is unlikely to be replicated in Europe, not least because of the negative returns that are typically on offer from sovereign paper."
It continues, "The underlying purpose of the EU reforms is the same as that in the US though: to help protect smaller fund shareholders in the event of large cash withdrawals during periods of heightened volatility.... Although less transformational than the reforms rolled out in the US, investors will still need to make important decisions ahead of the deadlines. At SSGA, we will continue to offer a comprehensive range of fund options and are always ready to help our clients find the most appropriate solution." Following the reforms, European fund options will include: Low Volatility NAV, Public Debt Constant NAV, Short-Term Variable NAV, and Standard VNAV money funds.
The paper's "Capital Markets Outlook" section tells us, "For cash investors, the markets in which they operate are undergoing change. Some of this is incremental and reflects a natural evolution of financial markets in reaction to economic and policy changes. Others are more far-reaching in nature, with implications for investment choice. In the United States, potential adjustments to Treasury supply volume and duration is significant, as is the Fed's acceleration in the reduction of its balance sheet. How the debt ceiling negotiation is managed early in 2018 is important with additional supply a likely outcome at the end of the process. In Europe, change is also on the horizon amid regulatory changes and a slowing pace of central bank asset purchases; but for short-term investors, conditions are unlikely to change much as negative yields seem set to hold sway."
SSGA writes, "In the near term, the US will once again be dealing with a debt ceiling limit. While all previous debates have concluded with a resolution, there is still the potential for a technical default of a US treasury bill. We should stress that this is not our base case. We see it as an extremely remote scenario, but it nags at the consistency of US Treasury bill issuance and how the US Treasury manages its excess cash. In 2018, consensus estimates indicate an additional US$430 billion of new Treasury bill supply."
The paper tells us, "US money market credit spreads had a nice recovery in 2017.... However, the significant decrease in money market prime assets ultimately limited the extent of the recovery in credit spreads. By the middle of 2017, the tightening had halted and remained stable through to the end of the year. It's anticipated that credit spreads will remain range-bound through 2018, barring any macro-economic shocks; we would expect the yield spread between the prime money market fund and the government money market fund to remain within its current range (25-30 basis points). For the most part, it appears that prime funds have 'normalised' their duration and liquidity metrics. We don't expect a substantial shift in liquidity, holdings or duration given our forecast."
Finally, it states, "Sourcing short-term debt at a reasonable price continues to be a challenge for European money markets. The repo markets have experienced significant dislocations around the end of every quarter and the year-end as a result of dealers withdrawing offerings and market liquidity freezing up. The ECB has reportedly considered implementing programs that would be similar to the US Federal Reserve's Reverse Repo Program, but complexity around such activity persists. It seems more likely that the ECB would probably issue some type of short-term unsecured debt by the ECB to mop up excess liquidity in those periods. This will become more critical when the ECB ultimately decides it is time to raise interest rates, something we don't anticipate occurring until 2019 at the earliest."
In other news, yesterday's Wall Street Journal featured an article entitled, "House Money-Fund Bill Hits a Snag," which explains, "A legislative effort to relax post-crisis money-fund rules has hit a snag and is unlikely to come to the House floor in its current form, according to GOP aides. The bill, which passed the House Financial Services Committee in a 34-21 vote this month, won't advance to the floor without alterations designed to attract more support, the aides said. "The bill is not in a form where it can pass through the House," according to one aide."
The Journal piece continues, "The legislation aims to scrap a 2014 Securities and Exchange Commission requirement that forced certain money-fund shares to fluctuate in value, rather than always remaining at $1.... The measure has drawn behind-the-scenes pushback from large fund managers such as BlackRock Inc. and Fidelity Investments. It is backed by Federated Investors Inc., a midsize, Pittsburgh-based company with nearly 70% of its assets in money funds. Spokesmen for Federated didn't respond to a request for comment. Opponents say the market has already adjusted to the 2014 requirement and are reluctant to force the SEC to revise it, worried about reopening a bruising fight over the funds' structure that could take years."
It adds, "Despite enough bipartisan to advance the bill out of the financial-services panel, five Republicans voted against it, including Reps. Bill Huizenga of Michigan and Sean Duffy of Wisconsin, who head two of the panel's subcommittees. The panel's chairman, Rep. Jeb Hensarling (R., Texas), voted for the measure but said he had reservations about it. House aides said lawmakers are working on making changes to aspects of the bill and might take up a modified version later this year, though they declined to say how it might be altered."
Finally, the Journal writes, "Opponents of the legislation also warn that reversing the rules could invite future scrutiny of the industry from the Financial Stability Oversight Council, a government panel that has the authority to target specific firms for tougher oversight from the Federal Reserve, according to a memo from the Investment Company Institute trade group reviewed by The Wall Street Journal. The Fed has long sought tougher curbs on money funds and its officials generally backed the 2014 requirement." (See also a recent Brookings Institution blog post.)
