As we mentioned yesterday, the Association for Financial Professionals' webinar, "2020 AFP Liquidity Survey: Maintaining Course in Uncharted Waters," featured updates from AFP's Tom Hunt, Crane Data's Pete Crane, Invesco's Laurie Brignac and Marsh & McLennan's Ferdinand Jahnel, and discussed the 2020 AFP Liquidity Survey." Below, we quote from Brignac comments during the event. (See yesterday's News, "Crane Discusses Cash Buildup, Drawdown, Waivers, ESG on AFP Webinar," our June 23 News, "AFP's 2020 Liquidity Survey Shows Safety, Bank Relationships Still Key," and our June 29 News, "More 2020 AFP Liquidity Survey: Ratings, Yield Important; ESG Not Yet.")
Brignac says, "We're going to be celebrating our 40th anniversary later this year, and I've been at Invesco for 28 of that and I thought, oh, my goodness, 40 years in this industry and we've experienced, unfortunately, multiple once in a lifetime events. You keep thinking you've seen it all, and then here it comes again. Obviously, the team has done a great job in terms of laying out what happened in March.... The markets are getting faster and faster; the volatility is increasing.... Obviously, we've never seen what happens when the entire world effectively shuts down. This is definitely unprecedented times, hopefully this is a once in a lifetime event that we won't see again. But I think it was also so much in terms of how quickly everything had to shut down back in March."
She continues, "[In March], there was the big upswing ... into the government money market funds, and ... a lot of focus on the prime money market funds. But when you look in comparison to how much smaller they are than the government money market funds, and when people were exiting the prime funds in March, you know, there's a little blip there. It felt a lot worse than obviously it looks like on the screen. But I think it kind of goes back to just how sensitive and how technical the markets are. So that's the other thing that I tell clients, it is so supply demand driven at this given point in time."
Brignac comments, "One of the things that we saw in March when all this money went into the government money market funds, there were just not enough Treasuries around, eligible treasuries, for the funds to buy. That's why we actually saw negative yields in T-bills and the short-dated securities back in March.... And I think that took everyone by surprise. Again, it was that velocity component."
She tells us, "Everybody was trying to buy Treasuries and there just wasn't enough to go around. The Treasury was terrific. We were on the phone with them, we were on the phone with the Fed and saying, you guys have to start issuing cash management bills. And they did within like a day, day and a half. Just adding that supply back in the market for all this demand, normalized the front end, at least on Govie side."
Brignac states, "We know the Fed is not a fan of a negative interest rate policy. We don't think that they're going to adopt a negative interest rate policy. But also, they are looking at this graph and saying at some point in time, all of this money is going to start to go out. And how does it go out versus the amount of supply that is available for purchase in the market?"
She adds, "The commercial paper market is still about a trillion dollars, which is good. We've seen CP supply dwindle a little bit.... Corporates are issu[ing] out long, taking advantage of low interest rates [and] Treasury is going to be doing the same thing. They want to issue out longer. They want to take advantage of lower yield out in the market and not rely on Treasury bills for a big percentage of their issue. So, we do know that this is going to start to unwind. It's just how does it unwind and how quickly does it unwind? And to make sure it's done in a way that's orderly, not to inadvertently have negative yields on the front end. So that's something else that we do talk to our clients about, something that we're keeping our eye on."
Brignac asks, "What is different this time than what we saw in '08? Obviously, this is a humanitarian event. It was a global shutdown. This was not a sector specific crisis. So, from our perspective, which was good, the Fed had a playbook. They kind of knew how to do this. They started rolling out a lot of their programs. And as you can see, the Fed was a lot faster in coming to the market in terms of getting right down to the zero bound. And again, you talk about the velocity, how quickly the markets were moving.... So that was a really good thing that we needed them to do."
She also comments, "In terms of just how the Federal government has come to the table, they have been very vocal in terms of, we're going to do everything that we can. The Fed has more tools in their tool box that they can implement. They made a lot of announcements in March, they've been implementing, tweaking and changing programs ever since then.... Obviously there's more in terms of what the Federal government can do in terms of potentially another fiscal package. But again, it's like there's things that we can do to support the markets and support the economy. But also, one thing that we're just keeping our eye on is, again, how does this unwind? What does it look like when things start to improve and everybody kind of adjusts to the new normal?"
Brignac says, "I would also highlight ... the credit issues. How are we looking at that? As we know, this was not a credit event, it was a liquidity event. But we also know liquidity events over time can turn into credit events. So, from our perspective, we've seen the Fed come in and they've effectively anesthetized the market. You know, we've seen risks really get mispriced in the market as a lot of demand is chasing too few supply, too little supply."
Finally, she tells the AFP webinar, "So, it's something that we are just really paying very close attention to. We think that they’ve done a great job in terms of coming in, doing what they need to do in terms of supporting the market. But we also are starting to see levels get down, clearing levels are just very tight, very expensive. So, you know, the risk appetite is absolutely gone. You kind of have to respect the trend. But at the same time, especially when you're dealing in finance and the liquidity space, we're being very careful in terms of where we're sending our money to work."
