Today, we again excerpt highlights from our recent Money Fund Symposium conference in Philadelphia. This time we quote from the "Senior Portfolio Manager Perspectives" session, which featured Mike Kitchen of Cavanal Hill Investment Management, Pia McCusker of State Street Global Advisors and Peter Yi of Northern Trust Asset Management. They tell us about Treasury, repo and credit markets, and comment on what they're buying and not buying. (Note: The Money Fund Symposium recordings and materials are available to Attendees and Crane Data Subscribers here. Mark your calendars for the next Crane's Money Fund Symposium, which is scheduled for June 20-22, 2022 in Minneapolis, Minn.)
Kitchen comments, "We had a Prime fund until the reforms kicked in in 2016 and we converted that to Government fund. We already had a Treasury fund. And at times the two seemed to be almost the same, because there was not a lot of value out in the agency sector, or anywhere, for that matter.... I'm not aggressively buying in October right now. I think there probably will be a cascade of supply a little bit after that. We are kind of looking forward to that. In the Government fund, we've been concentrating a lot in SOFR-based floaters, usually at FHLB or Farm Credit.... Right after the March of 2020, they were really attractively priced, and you're still getting a basis point or two over repo."
He continues, "We stay away from ultra-short Treasuries normally. There's just no yield kick to them. One thing about our funds; they're heavily institutional. Almost all of our shareholders come from within the bank.... So, we keep a lot of liquidity. We always keep probably more repo than most funds, because we can have very large swings in cash. We work closely with the relationship managers that know the shareholders, and we get a heads-up, usually early in the morning before there any major cash flows. But we like liquidity a lot."
Yi talks about repo, saying, "We think about repo in four different categories. The biggest one, the most notable, and probably the highest profile at this point is the Fed's reverse repo facility. For us, we think that's probably the best place to park your liquidity right now. Obviously, it's floored at five basis points. You think about all the supply technicals that we're going to see once the debt ceiling is addressed. We're expecting there to be a lot more Treasury bills that are going to come online. So, again, to Mike's point, Treasury bills ... are not yielding a whole lot. We're all raking in the little breadcrumbs here trying to get some yield. But at least the way we think about it, we think it's the best trade right now, the RRP. It gives us a little place to invest our liquidity and wait for things to back up once we start to see more supply to come along."
He states, "The second part is FICC repo. That product has kind of evolved a little bit.... Supply has gone away, and it's really because of the economics of it. The sponsors that are most active in this product ... it's just become more difficult to make those economics make sense. So, I think balances across the industry have really been dropping pretty dramatically. The third repo sleeve ... is your normal traditional dealer repo. It's no surprise ... those balances have been dropping, because, dealers just don't have as much in Treasury bills that are sitting on their balance sheet. Balance sheets are valuable."
McCusker tells us about CP issuance, "From my perspective, it's one bright spot in the entire industry ... the issuance has grown year-to-date. They've been very active this year. Yet global issuers continue to remain well funded, whether it's deposits, central bank or strong deposit base or efficient balance sheet optimization. But we are seeing issuers taking advantage of USD dollar CD and CP markets. Obviously, they see better opportunities in terms of funding here rather than in their local currencies. You're probably seeing some of the issues replace some of their more expensive notes ... and reissue that into shorter duration offerings because of the insatiable demand we have here in the short-term funding markets."
She says, "We've been participating in overnights, weekly, inside of one month credit names, [which give] a pickup in yield over a traditional repo.... I grew up in ABCP land, so I'm appreciative of the innovation that this asset class continue to build. For instance, you saw the conduits and new programs out there, obviously taking advantage of the ability to securitize repo balances and help out with dealers in terms of their addressing their liquidity and leverage ratios. This asset class could potentially be sizable going forward, and it's definitely helpful for the industry. But again, [we're] just appreciative of the fact that ABCP still continues to grow. I like to think that [we're] thinking outside the box in terms of our focus on that."
Yi tells the MFS crowd, "RRP is one of the best trades we can do out there right now for liquidity.... Maybe it's easier just to kind of say what we're not buying, we're not buying Evergrande.... I say that jokingly, but money market investors are kind of conditioned to think about contagion.... We really have not been buying Chinese banks, really, ever. These are the times where transparency is critical, and some of the challenges, just thinking about Evergrande. Again, it's a high yield issuer. But we are still unclear on what's going on behind the scenes."
He adds, "If there's a hint of headline risk, we think about secondary liquidity. We think about what this can mean towards, 'Are these issuers going to be active? Are they going to be backing up their spreads?' So far, I haven't seen a whole lot. But again, those are the things that ... you think back to the European debt crisis.... Investors were looking at all these bank exposures in the countries that were really under stress.... Now, we don't know the extent of the contagion with Evergrande. So, again, it's just another example of us just kind of looking at the market and seeing if there's any stresses within the infrastructure."
In other news, Fitch Ratings recently published "Local Government Investment Pools: 2Q21," which says LGIP asset hit record highs last quarter. They write, "Based on observed cyclical patterns, the second quarter of the year has historically been a period of strong net asset growth, and 2Q21 was no exception. Cumulative assets for the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index reached a new high of $423 billion at the end of the quarter, an increase of $28 billion qoq and $55 billion yoy."
The report states, "The Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index ended the quarter with average net yields of 0.04% (a drop of 32 basis points from the year prior) and 0.61% (down 54 bps from June 2020), respectively. LGIP managers continued to cautiously extend their exposure out the curve during the quarter, with the weighted average (WA) maturity of the Fitch Liquidity LGIP Index increasing to 50 days. This marks the third consecutive quarterly extension to the maturity profile of the index as managers look for opportunities to put excess cash proceeds to work amid the current low rate environment."
Finally, Fitch says, "During the coronavirus pandemic-related market volatility in the spring of 2020, LGIP managers actively shifted their portfolios toward more of a defensive asset allocation. With the worst of the market volatility now a full year removed, managers have continued the trend of slowly adding more corporate exposure back into their portfolios. Yoy, combined allocation to asset-backed securities (ABS), CDs and CP, specifically with the Fitch Liquidity LGIP Index, increased to approximately 32% of the index as of June 2021, up from 22% as of June 2020. Conversely, combined exposure to U.S. Treasury and agency debt dropped to 37% of the index, down from 44% as of June 2020."
