This month, MFI interviews Deborah Cunningham, Federated Hermes' Executive VP & CIO of Liquidity Products. We ask her about the crazy month of March, and about the current state of the money fund sector, flows and the Fed's support programs. Our Q&A follows. (Note: The following is reprinted from the April issue of Money Fund Intelligence, which was published on April 7. Contact us at info@cranedata.com to request the full issue or to subscribe.)
MFI: Give us a little history. Cunningham: I've seen 17% interest rates and 17 basis point interest rates, and neither one of them are healthy. I've been in the industry for the better part of four decades, and worked my way from accounting into the investment group through the credit area. I've been on the portfolio management side now for 25 years.
MFI: How are you holding up? Cunningham: Well, things have definitely gotten better. I think the worst days were in the beginning of the week of [March] 16th ... then things started to get better a little bit better on [March 19-20]. I would say the markets definitely turned a corner to some degree on Monday [March 23].
For Treasury securities, the worst days were last week after the massive decrease in yields, but without any real additional volume in Treasury securities yet. Ultimately, you were able to keep positive yields by participating in the primary issuance of bills. But to try to buy anything in the secondary without going into negative territory was almost an impossibility. With the stimulus package … and the additional bill issuance ... that sector is now much healthier.
The muni side is still probably the most disjointed, but it's improving. We'll see a SIFMA reset today.... It will adjust downward. Our thoughts are that it will probably stay elevated through the middle of this month with adjustments downward each week, and then start to return to more normalized levels by the end of the month. Certainly, the Fed's nimbleness in adding first, the high-quality short-term tax-free notes and securities to the MMLF, and then ultimately VRDNs.... Both of those helped immensely from a municipal money market fund standpoint.
MFI: How does this compare to 2008? Cunningham: There were credit concerns in the 2008 timeframe, and it was very sector-specific. Banking was hit hard, broader financial markets were hit hard, and because there weren't as many disclosure requirements back then, investors weren't sure what their money market funds owned. With disclosure as it is now, on an almost continuous basis, and the fact that there's no finger-pointing here, [it's different]. This is nobody's fault. This has huge implications from a worldwide perspective, [so] I feel like there's a rallying point at this time to fix every problem that arises.
MFI: Talk about Fed & Treasury support. Cunningham: There weren't really any pricing issues that were causing consternation with NAVs. It was more, from a daily and weekly liquidity level, making sure people are comfortable with those.... I'm not even sure how the NAV insurance would work with floating NAVs. If I recall correctly, it was a 25-basis point insurance policy [in 2008], but basically that was an insurance policy off a dollar calculated to the penny. How does that translate into NAVs, that some are above, some are below on a four-digit basis to that one dollar? It doesn't have as much meaning in the context of a four-digit NAV. So, there are questions about how that would even work, but it was never really contemplated as the issue.
Investors weren't concerned about the efficacy of the securities that were owned. I don't think anybody thought that what was held in a prime fund or what was held in a tax-free fund was not going to repay appropriately. I think that it was just a question of, 'What's the secondary market liquidity look like?' If liquidations need to go on in perpetuity, then how does that get firmed up? That's where the Fed programs stepped in to help. Certainly the MMLF helped provide a ceiling for spreads and restart secondary market liquidity.
I think the PDCF [Primary Dealer Credit Facility] was an underrated facility that was really, really helpful to secondary market dealers. They genuinely felt like they knew where the market should be but had no balance sheet left. The PDCF, I think really helped free up that balance sheet. I can't say enough about that..... The PDCF, I think in its infancy and it's use within the money market, helped free up and start the liquidity regeneration process in those longer-term markets as well.
MFI: What's next? Cunningham: Low yields, definitely. I think we're past the worst time from a Treasury market perspective, with the supply demand imbalance being taken care of to some degree..... I would expect more [Treasury supply] going forward, given the enormous amount of funding that's going to be needed for this $2.2 trillion in fiscal stimulus.
I also believe we turned a corner last week when the outflows from Prime funds slowed and we started to see smaller inflows into government funds. Government funds are certainly feeling the yield impact a lot more so than prime funds at this point, and a whole lot more than muni funds. You're going to see some additional demand from the marketplace; shareholders going into those types of funds like prime and muni that have capabilities beyond just the Treasury market. So, that should be a good thing for both the supply and the demand side.
Having said that, I unfortunately believe waivers are inevitable for all product types. [W]e've seen at least one fund family decide to close their Treasury product to new investors. If I recall correctly there might have been six or seven of those that closed or altered their products in 2008.... Federated did not do that and Federated Hermes at this point does not intend to do so. Our goal is to be a liquidity provider, which means in our estimation, we take your cash into the products that you want and invest it as best we can, and we give it back to you whenever it is that you need it.
I don't think we'll be in the zero-rate environment [for years]. I feel like the economy is certainly going to take some hits. You've got pockets of credit issues that are going to start creeping to the surface here pretty quickly. Thankfully, they are not for the most part issuers that are prevalent in the liquidity space, which means these are other markets' problems. Nonetheless, they will impact what happens in the broader economy and how fast recovery can begin.... We should rebound sooner and faster.... There will be waivers. Yes, there will be funds at 0 and 1 basis point levels, again. But it shouldn't be long lived -- months and quarters, not years and decades.
MFI: What about customer concerns? Cunningham: They're definitely on the phone asking appropriate questions of their managers. They want reassurance that the funds are open, that they're liquid, that they're not contemplating any types of gates or fees.... Their focus seems to be on the 10% daily and 30% in weekly liquid assets. If a fund in the industry pierced those bounds, what would that mean? Would they choose to impose a gate or fee? The industry needs to update shareholders on these liquidity rules, making sure they understand them.
Also complicating matters is that these conversations are happening from a home setting. I've heard more babies crying and dogs barking in the background than was ever the case in my professional career. So, it's refreshing that people are resilient enough to get their job done and to get the answers that they need, even in circumstances where they're not in that familiar setting where they normally would be conducting their business. So that's a good thing.... The informed shareholder is the happy shareholder.
MFI: How about ultra-shorts or offshore? Cunningham: We actually [just] had a record day in sterling MMF inflows.... The offshore funds continue to be fine operationally and investment-wise.... The Local Government Investment Pools (LGIPs), right now are awash in cash because ... this is a point when they are generally paying out [and] undertaking projects. But because [projects have been] cut way back, the LGIPs have more cash now than they would normally have during this part of their cash flow cycle.
As far as ultra-short funds go, our ultra-short government fund has been gaining a lot of cash.... The corporate ultra-short products and our muni ultra-short products have definitely been losing cash.... Thankfully, some of the ... [programs and] buying by the Fed has put a bit of a price floor and a spread ceiling on those markets.
MFI: Comment on MMF reforms. Cunningham: The support that's been given has been given to the [overall] markets. Yes, the MMLF is specific to the money market fund industry, but the PDCF is specific to the primary dealers. A number of other facilities are specific to banks, and a number of other facilities and programs that are specific to state and local government, private industry, small businesses. I believe the Fed was quick in their response time.... Having gone through 2008, I feel like they were able to react in a ... broad way because they realize, there's no question this is nobody's fault.
This is a pandemic and we have to figure out how best to deal with it across all sectors and all industries.... For that reason, I think you've got to look at this and say, I think the money market functioned as they should have with the appropriate regulations as they were changed in 2016. Might it have been better if we had everyone on a fixed NAV? Probably, but I don't think it would have made that much of a difference.
MFI: What about future growth? Cunningham: What's different about this asset flow [vs. the last zero yield period] is that it's not likely to be influenced by bank rates being supported.... The unlimited FDIC insurance provided an assurance to investors back in the 2008-10 timeframe. That is not the path being entertained this time, and I think that's a good thing for the money fund industry.
Certainly, the biggest group of recipients [of cash this time] are the government funds.... What encourages me is that we're opening new accounts every single day in large volume. It's not just existing shareholders increasing their liquidity and improving their risk profile. It's new customers coming into Federated Hermes products, and I'm sure coming into the industry [overall as well]. And I think they'll be pretty happy with how they're received. So, I think the industry will continue to grow. I mean, I predicted over $4 trillion this year, but I can't say that I predicted it in this fashion.
