ICD recently hosted a webinar entitled, "Global Markets Update 2022 with BlackRock," which asked, "What are the trends that will impact investors in 2022 as the world transitions from a pandemic-focused economy?" The session was moderated by ICD's Justin Brimfield and featured BlackRock Global CIO Rich Mejzak and BlackRock Director and Govt Fund PM Eion D’Anjou. Its description says, "BlackRock joins ICD to discuss: Expectations around inflation, rising rates and yields in money market funds (MMF); Impact of labor market and supply chain concerns on the global economy; and, BlackRock Liquid Federal Trust Fund (BLFT) and other investment opportunities in the year ahead."
Mejzak comments, "We obviously are very thoughtful about flows, or anticipated flows, into and out of our products. We run liquidity products. So that is going to be a huge determinant of how we manage strategy, especially in front of a rising interest rate environment. Up until this point, markets have been pretty aggressive in repricing the Fed. The reality was that a lot of the products that we invest in were not reflecting [this] to the same degree. That's a function of a couple of things.... The supply-demand dynamic in the front end was out of skew, you had money assets that were largely unchanged over the last several quarters, and you had diminishing supply."
He explains, "The supply part of that, I think, is beginning to change. If you think about it, we got there for a real, rational reason. Over the last couple of years, interest rates were incredibly low, and credit spreads were very, very tight. So everyone, including the U.S. Treasury, took that opportunity to refinance if they could.... Especially in investment grade, we saw record years of issuance and most of that was skewed towards longer end of the curve. We're starting to see a little bit of a reversal of that."
Mejzak continues, "Last year we saw an increase in issuance in the one-to-three-year part of the curve. We're seeing that again this year, and we're seeing a slight uptick in the commercial paper supply, as expected. It's more cost effective.... So we're seeing a little bit more supply.... You also have the reverse repo program ... there's $1.7 trillion in the RRP ... that has nowhere else to go. There just aren't enough assets. That's starting to change as markets are repricing."
He says, "We think that it depends on product, when we think about investment strategy. It really matters who our client is, their liquidity needs [and] the transparency into the liquidity.... For money market funds, you really don't have much of a choice. [W]e need to respect the chance of 50 [bps] in March. But for our separate account clients, or even some of our short duration strategies, where you have 2.0% funds priced in by next year, you do need to look at some of this stuff.... [S]ome of our clients are really inclined to grab the income that's available right now. We're starting to do that. [But] you absolutely need to be laddered.... You just constantly have to have stuff maturing. It's tough to pick a spot on the curve that you love just because you want to be able to reinvest if rates are going to continue to go higher."
Mejzak adds, "Then the other thing you touched on was liquidity. It's likely that if we are to see further exaggerated volatile moves in markets, it's going to be because of liquidity. Liquidity is not great. We talk about this all the time, whether it be any asset class.... The reality is money has been chased into risk assets ... whether it be real estate or equities or cryptocurrencies, for that matter.... When they come under pressure, they need to get sold. That eats up risk budgets and ultimately when risk budgets get eaten up, there's less balance sheet room for any type of security, including 2-month commercial paper. So, we're very thoughtful about that and how we invest."
D'Anjou comments, "It's no longer transitory. It's nimble. I think that's the way that we're thinking about investment strategy.... I would highlight two words ... cautiously and conservatively. So, it's a tale of two markets. In 2020-2021, we were running above average duration metrics pretty consistently. We were in an abundant liquidity regime, [there was] a lot more demand than supply, and we were in a low-rate environment. So running a little bit higher duration metrics made sense both in fixed and in floating. Now we're in a bit of a sea change. Since the fourth quarter ... we've been really, really conservative with our duration extension. We are running I would call it an underweight in duration ... and an overweight in liquidity in those funds that have accessibility to repo. I think that's pretty prudent and that's the way that we're going to continue to progress."
He states, "The Fed continues to tell us that they're keeping all options on the table.... I think it's going to become extremely apparent that the committee is going to find themselves or may find themselves behind the curve, and that's going to warrant them moving faster towards normalizing monetary policy. Our expectation on the desk is low probability of a 50-basis point hike at any meeting, but we have to respect the possibility that they may go there.... We still think that there's going to be consistent 25 basis point hikes over the course of the year."
D'Anjou also says, "I think you see that the price action just tells you that the rate structure looks appealing. But again, we're in this abundant liquidity regime that we keep mentioning that the committee now needs to find their way out of.... It's going to be anything but smooth. So, we're going to continue to see market volatility like we're seeing today, like we've seen for the last six weeks. I think again, it warrants being conservative with duration maintaining above average liquidity."
He continues, "The overall size of the money fund complex is about $3.6 trillion in assets at the onset of the pandemic, right around $4.65 trillion at the end of January 2022.... There's still a concentration of assets that are in money funds that you have to respect. And within that, there's a concentration among buyers, right? There's only a handful ... you can think of that are that are pretty sizable in the industry. So, it puts a premium on maintaining above average liquidity."
D'Anjou adds, "[That's another reason] why we're overweight in repo, as Rich mentioned. We don't expect to see a massive outflow of AUM ... clients, have a different behavior. We've seen that there's broad-based comfort holding above average cash buffers in the event that there's, an uptick in COVID concerns, etc.... Corporations are comfortable running above average cash buffers to not run into issues that they saw early 2020."
When asked about spreads, Mejzak answers, "If we get 50 bps on March 17 [we'll see spreads between Prime and Govt come back]. I'm kidding, but I'm not kidding. Clearly the relationship between the two has been distorted by fee waivers. Assuming a rate hike in March and now potentially 50 bps, that happens, I don't want to say overnight, but most funds keep 50% seven days and shorter.... That that gap will start widening within days. We did a lot of work on this [during the] last money fund reform.... Regardless of the absolute level of interest rate rates ... the average spread was around 30 bps. You would think we could probably get there in fairly short order again."
On bank deposits, he says, "We hear the same thing from everyone.... Bank deposits are going to lag money funds in yield.... Banks are reluctant to get more deposits without the demand for loan growth on the other side. So the expectation [is that] there's going to be movement from deposits into the money funds. Having a horse in the race, we certainly hope that's the case."
Finally, on MMF Reforms, Mejzak adds, "Money market reform actually hit the Federal Register ... so it's officially here. [There's an] open comment for 60 days. I think it's April 11th the responses are due. We certainly will be responding to that. I'll spare everybody the details ... but yes, it's coming. Final details are TBD.... The Government space [is] less likely to be impacted. But any Prime strategy is likely to have some impact. So, we don't know. We're in a much different place than we were last time we went through reform.... We've already seen that massive movement of assets. So, there is a tendency to believe that some of the Prime assets are perhaps stickier. But they are certainly potentially impacted here through reform."
