Western Asset published the brief, "Segmentation and Horizons Within Short-Term Investment Strategies," which tells us that, "An MMF may be the best solution for cash that requires daily liquidity, but this high level of liquidity comes at a price. Setting an investment time horizon that is too low for your needs will give up valuable yield on the investment—an unwelcome result further pronounced in times of low interest rates.... At the heart of an investment strategy for traditional cash investors, such as corporate treasurers investing excess balance sheet cash, lie the critical interdependent objectives of preserving capital, maintaining adequate liquidity and generating an attractive level of return." (Note: Please join us for Crane's Bond Fund Symposium (Online), which takes place the afternoons (1-4pmET) of March 25-26. Registration is $250 and "comp" tickets are available to sponsors and clients. Contact us or click here to register or for more info.)
They write, "Although these goals will drive cash investment decisions, they often overlook one critical component: time. Only by assigning an investment horizon to balances -- or segments -- of cash can an investor effectively define what is meant by these objectives. Preservation of capital is certainly a worthwhile aim, but it is only really meaningful when applied to a specific time frame. For instance, the question should be asked of whether an investment needs to not lose money from one day to the next, or whether it is more important that the investment not lose money over a rolling time period such as three months. Could the need for liquidity occur on any given day without much warning, or will there likely be some degree of a notice period? By assigning cash balances to different segments with differing time horizons, an investor is able to determine the appropriate level of risk for the overall investment, thus aiming to generate the highest level of return while still meeting the core objectives."
Western explains, "The current low interest rate environment also presents an opportune time to implement a segmentation strategy. Rates in the US remain exceptionally low compared to longer-term averages, meaning liquidity remains expensive. Making an investment with an investment horizon that is too short for your needs represents leaving returns on the table at a time when every basis point of yield is important. Similarly, the corporate credit environment remains robust as demonstrated by the current low level of negative rating changes for investment-grade companies. This suggests that increasing credit risk in an investment may now be prudent."
The paper continues, "It should be noted that when considering an 'up in risk' strategy change, particularly when that move is away from MMFs, yield is not always the same as return. The yield of a strategy represents the income received from the individual bonds held in the portfolio. The return delivered to an investor will only equal the yield if all of the bonds in the portfolio are held to maturity. This is typically the case for MMFs but not, however, for strategies investing in bonds that mature in one year or longer, as the portfolio manager will normally switch out of the bond into an alternative before the bond reaches maturity. For this reason the expected return for short-term strategies other than MMFs may be lower or higher than the quoted yield."
Western adds, "This approach to cash segmentation is only possible with a comprehensive forecast of cash flows. As the total cash balance is expected to fluctuate over time, discrete balances of cash can be aligned to differing investment horizons with associated risk and return objectives represented by distinct investment segments. For example, here's what a cash segmentation approach could look like by the type of funds needed on hand and their associated investment horizons: Operating cash: daily liquidity, Core allocation: 3-6 month horizon [and] Strategic allocation: >6-month horizon."
In other news, Fitch Ratings recently release its "March 2021 U.S. Money Market Funds" summary. They write, "Total taxable money market fund (MMF) assets increased by $44 billion from Jan. 29, 2021 to Feb. 26, 2021, according to iMoneyNet data. Government MMFs gained $61 billion in assets during this period, offset by a $14 billion decrease in prime MMF assets. MMF yields have plateaued at near-zero levels since initially decreasing when the U.S. Federal Reserve cut rates in response to market volatility in March 2020. Institutional government MMF yields have remained unchanged at 0.02% since Dec. 21, 2020 and institutional prime MMF yields have remained at 0.03% since Jan. 13, 2021, per iMoneyNet data."
The report also says, "Prime institutional funds increased their daily liquid assets (DLA) and weekly liquid assets (WLA) when they experienced extreme market volatility in March 2020 and now maintain levels higher than liquidity before. Prime institutional average DLA and WLA increased from 27.4% and 40.7%, on Feb. 28, 2020, to 32.5% and 47.8% on Feb. 26, 2021, respectively, according to Crane Data."
Finally, Crane Data also published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of Mar. 19, 2021) includes Holdings information from 93 money funds (down 26 funds from a week ago), which represent $2.740 trillion (up from $1.978 trillion) of the $4.701 trillion (58.3%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.462 trillion (up from $1.071 trillion a week ago), or 53.4%, Repurchase Agreements (Repo) totaling $676.1 billion (up from $468.8 billion a week ago), or 24.7% and Government Agency securities totaling $318.3 billion (up from $248.0 billion), or 11.6%. Commercial Paper (CP) totaled $101.8 billion (up from $69.8 billion), or 3.7%. Certificates of Deposit (CDs) totaled $65.0 billion (up from $48.0 billion), or 2.4%. The Other category accounted for $81.3 billion or 3.0%, while VRDNs accounted for $35.4 billion, or 1.3%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.465 trillion (53.5% of total holdings), Federal Home Loan Bank with $158.5B (5.8%), BNP Paribas with $81.9B (3.0%), Fixed Income Clearing Corp with $76.7B (2.8%), Federal Farm Credit Bank with $62.3B (2.3%), RBC with $58.7B (2.1%), Federal National Mortgage Association with $53.3B (1.9%), JP Morgan with $52.4B (1.9%), Federal Home Loan Mortgage Corp with $41.6B (1.5%) and Credit Agricole with $37.0B (1.4%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($209.1 billion), Goldman Sachs FS Govt ($188.0B), BlackRock Lq FedFund ($169.0B), Wells Fargo Govt MM ($136.3B), Fidelity Inv MM: Govt Port ($131.9B), BlackRock Lq T-Fund ($124.9B), Morgan Stanley Inst Liq Govt ($112.9B), JPMorgan 100% US Treas MMkt ($103.5B), Federated Hermes Govt Obl ($103.5B) and Goldman Sachs FS Treas Instruments ($92.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
