TD Securities' Priya Misra recently hosted a "Virtual Roundtable," entitled, "Managing Money Markets," which featured Federated Hermes' Deborah Cunningham, Fidelity's Richard Bohan, TD Securities' Mathieu Lachance and Crane Data’s Peter Crane. Misra kicked things off by saying, "It has been an unprecedented time for the market, and especially money markets. Government money market funds have seen significant inflows of over a trillion since Covid. Prime funds saw some outflows, but they have started to come back pretty significantly. Bill issuance has been very high with more than $2 trillion of additional Treasury bills outstanding [and] the GSE market has been robust with significant issuance of floaters from Fannie, Freddie and Home Loan.... So, we have a challenging backdrop with a ton of supply, inflows which risk going the other way and a low rate environment.... I'm very excited to have this all-star panel today to analyze all these issues." (Please Note: We'll be hosting our next "Crane's Money Fund Webinar: Portfolio Manager Perspectives" on Wednesday, July 22 at 1:00pm EDT, which will feature Federated Hermes' Sue Hill, Northern Trust Asset Management's Peter Yi and UBS Asset Management's David Walczak. Click here to register.)
Discussing the massive MMF inflows, Cunningham comments, "I'd just emphasize the stimulus side of the equation.... I do believe a substantial amount of the flows that came into the market, certainly in April, whether it was in the municipal side, from state and local governments, whether it was from corporations, institutionally or even from individuals, there is a lot of stimulus money that was being handed out from the government. And I think a significant portion of that went into money market funds. Some of it is still there. A lot has actually gone out and been used. The potential for another round might be in front of us. But I do believe that was a pretty big [factor] in the flows that we saw."
Crane explains, "The size of the inflow was unprecedented. It was three times what we saw in 2008 go into government funds, $1.2 trillion over two months. Prime funds saw about $150 billion outflow, and that occurred in the middle of what should have been a weak period.... I tend to discount that it was money taking shelter from the market. It was corporations, individuals all raising cash and halting their spending too, to let the cash build up. So, I don't expect a lot of it to go back in the market. You don't have a lot of brokerage sweep money that's in money funds anymore. It's all institutional, which makes up two thirds of the assets. Even a lot of the retail is now position type. So, it's in chunks that won't move just immediately from the stock market."
He adds, "We're going to see outflows today {July 15], because of Tax Day. We're already seeing big outflows, [and] you're going to see outflows in the coming weeks. But once you get into the fall here, seasonally money funds see big inflows. So, whether that was taken away from the initial cash build up remains to be seen.... Back in 2009 and 2010, you had 15 percent asset declines. Once yields settle at zero and the panic subsides, the money will start slowly filtering out. But I still think people are building their cash war chest, so I think that's going to counteract the companies spending down a lot of the money."
Bohan tells us, "We've got, starting today with corporate tax and individual taxes over the next couple of weeks, money coming out. You know, it's pretty obvious what we'll see over the next couple of weeks. But there is that seasonality in the second half.... I think the likelihood of another stimulus package is high. That money probably winds up in money funds until it gets deployed. Corporates, I think, are probably still somewhat cautious about spending, so I don't see a lot of that money going out anytime soon. And you've got an election to contend with, and I think there's an uncertainty around that. I think that it's going to be difficult for people to really commit on massive spending in front of that. So, uncertainty usually leads to increased liquidity and much of that liquidity will be in money funds."
Lachance says, "I think there's also seasonality in terms of Covid. As September rolls around, there's a lot of pressure to reopen schools. And we know that as social distancing declines, the spread of the virus grows and there will be more cases. We've already seen it over the summer, with some states reopening maybe a little early. But as schools reopen in the fall, more workplaces will be able to reopen. And, as the infection rate goes up, if the number of deaths also goes up. This creates a backdrop of a need for more fiscal stimulus, which should also be supportive for inflows into money funds."
On the municipal MMF space, Crane tells the webinar, "It still hasn't recovered since the 2016 changes. It's a small slice, a little bit less than five percent of the overall pie. Given all the massive deficit spending, though, at some point in the future, taxes are going to go up. So, I assume tax exempt money funds should survive to the point where they become useful again. They're about to get hit by the double whammy, though. [There will be] concerns about credit hitting the segment, and now the zero yields are going to compress all yields on top of each other. A tax advantage doesn't mean anything if there's no income that's taxable in the first place. On the flip side, that space is almost entirely retail and those [investors don't] like to pay taxes no matter what. The asset base has shown itself to be stable."
Cunningham comments on the credit space, "Commercial Paper, CDs, Asset-Backed Commercial Paper; those are still the traditional financings that we do out of Prime Liquidity products.... In an interest rate environment that's zero to maybe 45 basis points, it still looks pretty attractive from a spread perspective. On the other hand, [with] some of the other classes ... Repo, GSEs and Treasury bills, there is potentially [more] liquidity.... When Repo was down in the one and two basis point area, it was one of the least favorite [options]. Now it's a little bit firmer at eight to ten basis points."
She continues, "I also think for Prime funds, buying a 3-month T-bill, which is in the overnight liquidity bucket and has ultimate liquidity if there is a sale that's needed, is a pretty good alternative at this point. I think a lot of Treasury securities on that very short end are being purchased in lieu of what would have traditionally been overnight securities.... When you see very high overnight and weekly liquid assets in the Prime money market funds, yes, absolutely, there is cash that's available if it's needed on a daily basis. But it's not all securities or instruments that are maturing the next day. I think some substantial portion of it is in the bill market, which is why that's also an appropriate response."
Finally, Cunningham says about potential new regulations for money funds, "All good deeds are sometimes punished. I believe that the Fed showed its support for the broad markets in this catastrophe.... But I agree what was and has already been done should suffice. It will, nonetheless, I believe be discussion topic at some point, in the somewhat distant future."
