State Street Global Advisors published its "2020 Global Cash Outlook" recently, which is subtitled, "Insights for the Future." SSGA Senior MD & Global Head of Cash Management Pia McCusker tells us in the Foreword, "A year ago, the Fed's dot plot projected two rate hikes, for an end-of-year target range of 275-300 basis points (bps). Instead, the Fed cut rates three times, bringing the target range to 150-175 bps. Money market yields followed accordingly.... As noted in our outlook on rates, in 2020, markets are not expecting the Fed to change rates by more than 25 bps." She says the outlook addresses: why duration was so short as rates fell, the forecast for credit, September's repo rate spike and prime money fund assets. McCusker adds, "[T]his year's outlook continues our coverage of cash innovations, which are picking up speed. With private sector initiatives such as Libra, Fnality and JPM Coin and the Fed's efforts to modernize its payment system, the way treasurers move money is poised for some dramatic improvement."

SSGA writes, "As we approach the end of 2019, financial markets (both debt and equity) are striking a relatively optimistic tone, despite evidence that suggests that the credit and business cycles are in the latter stages.... For the last two years, our Credit Research team motto has been: 'Don't worry about the end of the credit cycle: be ready for it.' To us this means continuing to select cash investment counterparties that are best-equipped to maintain their fundamental credit profiles when a downturn inevitably occurs."

Under the section "Reinventing Cash," SSGA's Will Goldthwait comments, "The nature of money -- what it is, who issues it, and how it is exchanged -- is evolving at an unprecedented clip. Bitcoin celebrated its tenth birthday in 2019, in a crowded field of more than 1,600 cryptocurrencies. In the US, just 31% of transactions are now handled in cash. In Sweden it's down to 13%. Consumers, who have so far benefited the most from this transformation, are abandoning checks and cash in favor of peer-to-peer services such as Zelle and Venmo."

He continues, "The cash revolution arguably started in the early 1970s, with the launch of the first institutional money market fund. The money fund was akin to minting a new fiat currency: for the first time, customers could deposit cash outside of the banking system. For a variety of reasons, however, current innovations have had little impact on institutional money management, or on international transactions."

SSGA tells us, "Yet several new ventures are promising to begin phasing in new services as soon as 2020. The most prominent of these is Facebook's Libra. However, for institutional investors new initiatives including Fnality, JPM Token and FedNow could be more influential in delivering the 24/7/365 convenience that retail customers have come to expect, at scale and with the level of security demanded by businesses."

The section says, "Fnality seeks to create a decentralized, blockchain-based financial infrastructure, dramatically simplifying wholesale banking and enabling near instantaneous transfers. The initiative -- backed by a $63.2 million investment and about a dozen financial institutions (including State Street Corporation) -- also seeks to reduce or eliminate certain risks intrinsic in the global exchange system."

The Outlook explains, "The Federal Reserve (Fed) is also taking steps to modernize how cash is moved domestically in the US. Currently, the Fed's Automated Clearinghouse (ACH) payment system handles the vast majority of US domestic cash transfers.... In August 2019, the Fed announced that it would launch FedNow, a new real-time payment and settlement service, to make near instantaneous payments available to everyone, 24/7/365."

It adds, "As we wrote in last year's Global Cash Outlook, if the Fed implements real-time payments, we believe that money funds would seize the opportunity to eliminate deadlines and closures, and begin offering global access to funds in real-time, available at any given time, which the modern economy demands and retail banking customers take for granted.... The Fed is proceeding with the idea at a cautious pace.... Despite efforts for Libra, Fnality and JPM Coin, we anticipate that most financial transactions will still move through the Fed system, so the development of FedNow remains critically important to the modernization of institutional cash services."

This section concludes, "In the coming years, cash investors can expect more flexibility, with the current level of safety and liquidity. The private sector is moving quickly to enable a global solution unconstrained by working hours. Central banks are realizing they need to address this technological evolution and ensure the safety of the overall monetary system. Clearly regulation will play a very important part in this evolution. Post-money fund reform in the US and Europe, funds are safer and more liquid. Now is the time to progress beyond the traditional scheduling limits imposed by a payment framework that has not kept pace with technological evolution. Eliminating fund deadlines, allowing multi-regional settlement and embracing technological change are developments that would greatly benefit business."

SSGA's Outlook says about Prime MMFs, "In last year's Global Cash Outlook, we observed that many investors were considering moving some of their cash back into prime money fund strategies. Indeed, prime money fund assets under management (AUM) continued to grow in 2019, rising to $750 billion in November 2019, up from $536 billion a year earlier, and more than double from the low of $372 billion in the weeks after the October 2016 money fund reform deadline. This continues to support the observation that investors are comfortable with how prime money funds operate. We believe companies that invest exclusively in government money funds would be wise to weigh the prime fund yield benefits against the incremental risks inherent in these funds, and consider allocating to them."

Finally, it adds, "For what it's worth, at the time of writing in mid-December, there's a near total market consensus (at 98.5%) that the Fed won't raise rates in 2020. Instead, markets foresee a 38% probability that the range will be 125–150 bps and a 30% probability that rates will remain in the current range. Of course, these predictions could be as wrong as they were last year.... Also of interest to cash investors in 2020 will be the possibility that tighter funding in the repurchase agreement (repo) markets could trigger a repeat of the repo rate spike that occurred in the fourth quarter of 2019."

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