Aviva Investors, hosted a webinar in association with the U.K.-based ACT, or Association of Corporate Treasurers earlier this week, which discussed the "Current rate environment and the implications of monetary policy on money market fund yields." The outlook is not good, and the possibility of negative rates in Sterling and perhaps even USD, is very real, according to Aviva's Anthony Callcott and Caroline Hedges. Aviva manages one of the largest European Sterling MMFs, but it also offers "offshore" Euro and USD funds. (Note that these aren't available to U.S. investors.) We excerpt from their comments below.
Callcott explains, "We'll be drilling down the types of options that are available to treasurers to help with the management of their cash flows. The question is often asked ... are money market funds still a viable alternative to bank deposits? We feel that they certainly are, and as a product, they've shown, especially through times of crisis, to be resilient and a valid vehicle in order for investors to gain the diversification, access to liquidity and security of capital that they require."
He continues, "The niche of money market funds has been one that's been needed by all types of clients, be it corporates, financial institutions, pension schemes, local authorities, county councils, charities, housing associations. All have the same common goal, namely security of capital, diversification of investments and access to cash on a same day settlement basis."
Discussing last year's European Money Fund Reforms, Callcot comments, "The impact of these changes meant the money market fund providers created money market funds to be even more fit for [this] purpose than ever before. Navigating through times of crisis and stress markets has been so much easier for us all to manage as a result of these regulatory changes. So, it is with confidence that we can say that money market funds are still a viable alternative to bank deposits; resilient in times of stress market conditions and will continue to be so looking forward."
The moderator, ACT's James Winterton, posed a poll question on corporate cash holdings. He says, "We have bank deposits at nearly 48%, money market funds are nearly 41%, and then trailing really quite a long way behind, we have segregated holdings of T-bills or short-dated bonds at 5%, 'other' nearly 4%, and tri-party repo at 2.5%. Is that the sort of spread you were expecting to see?"
Callcott responds, "Yeah, I think so.... I think ultimately, it still is the security of capital, the diversification and access to liquidity that people crave.... They need that security to know that their money is safe. So, we certainly saw a rise in assets from our point of view. There was a stockpiling of cash, I'd say. There were fewer wants to be out there for mergers and acquisitions. It was very much, 'Let's ring-fence our cash; let's see how things settle.' So as a consequence, certainly more money coming through to the cash markets. In the short to medium term, it's our opinion that ... the need for daily access to liquidity, is going to continue to be of the highest importance."
He adds, "The challenge that we now face, aside from ensuring that we can embrace the new way of working, is adapting to the potential changes in the rate landscape, both here and potentially in the U.S. Interest rates have been low for many, many years in some geographies and in some cases negative. The question to ask is whether we'll see this pattern repeated in the U.K. and in the US. And if we were to, how do we manage through that and how do we ensure that our business remains fit for purpose?"
Callcot tells us, "As a provider of cash solutions, we all need to be quick to react to change. We need to be innovative, nimble, confident and assured in our investment decisions. Not just in times of crisis, by the way, but always, at all times. But it's paramount that we are able to facilitate change in fund structure should market dynamics and scenarios dictate to maintain business as usual, and to ensure that the clients, our clients, all clients, have the confidence to invest in our products going forward."
Hedges says, "Now, some of the new programs from the central banks included facilities to support the short-term markets -- the commercial paper markets, the repo markets and from the Fed, we even had a facility to support money market funds. As this liquidity increased in the system and as corporates built up cash buffers, yields plummeted very quickly and they made new lows in euros and dollars. So, what is the prospect of rates going even farther south and turning negative? ... The Fed has been quite vocal with their reluctance to take this path."
She continues, "In the U.K. however, we've seen the rhetoric [turn] increasingly dovish. The new governor himself has changed his language and view on negative interest rates, stating earlier in the year that he doesn't believe negative interest rates are an effective tool ... to a couple of weeks ago stating that it is one of the tools that they may use in their toolbox. And this hasn't only been from the governor himself, Andrew Bailey, but also other members.... It seems have also changed their stance. The market has [now] priced in negative yields.... Some issuers in the sterling money market space have even been pricing in negative yields over the last month, which is something we've never seen before."
Hedges states, "There are a few unknowns, unfortunately. What we do know, however, is that rates will be at the most near to zero or lower for the U.S. and the U.K. for many years to come. The recovery from the pandemic will take a long time and the threat of inflation is such a long way off. The government is actually trying to fight off deflation. What does this mean for money market funds? Money market funds should prepare for negative rates whether they expect them to materialize or not, both operationally and from an investment management perspective as well."
She explains, "LVNAV funds should have plans in place to move to accumulating share classes or VNAV structure. In terms of management of the portfolios, perhaps a long duration strategy would be most beneficial. What we've seen actually in the sterling space is that funds have been increasing their duration over the last few weeks in particular, but also over the last three months or so. Those that made this play early on have benefitted quite well because rates have been drifting lower for a few months. But because liquidity requirements are also required to remain high, you tend to see more of a barbell strategy."
Hedges also says, "All of the Sterling money market funds over the past few months, even during the crisis when yields were elevated and yields have gone lower now, they've continued to price at 1.00. As we know for LVNAV structures, they have a collar of 20 basis points. No triple-A money market fund breached that quota, even during the current crisis. Investors still continue to have their capital preservation, and for every unit that they invested in a money market fund they received a unit back. Yields in the interest that they receive or accrue on those funds have been drifting lower, for prime money market funds, that's still a positive net return."
When asked about what information clients are looking for, Callcott responds, "[They've been focused] around transparency; the ability to get a proper look through and the ability to get really quick information on the underlying assets.... But not only with the individual fund they might be dealing with, but as a cross-reference across a number of funds in an aggregated look.... So, that's the type of questions that we're getting at the moment from treasurers." (Note: Let us know if you'd like to see Crane Data's latest Money Fund Intelligence International, which tracks these "offshore" or European MMFs, or our latest MFI International MF Portfolio Holdings data set.)
