Plenty on the plate
After the election, cash managers have much to consider.
Polls and predictions won’t matter for long as Election Day arrives tomorrow, but uncertainty is going to stick around longer. Historically, the money markets don’t experience volatility anywhere near that of other asset classes, but they don’t like uncertainty any less than their equity and fixed-income brethren. No matter who wins the election, there will be heightened anxiety and many unknowns. What will it mean for much-needed fiscal stimulus, shifts in policy and potential regulations? And as fate—or rather the U.S. Constitution—would have it, national elections run up against year-end, adding unwanted pressure to an already stressful affair. It’s nothing cash managers can’t handle, and we expect it to abate when we—finally—shut the door on 2020.
But 2020 will be with us for quite a while as the world recovers from the heath crisis and economic aftermath. In the financial sphere, we will see continued scrutiny of money market funds. This was a topic of discussion during Crane Data’s online Money Fund Symposium last week. (Thanks again to Peter Crane for inviting me to speak.) A major focus was the persistent inaccurate blame ascribed to money funds for the March crisis. Paul Schott Stevens, soon to retire from a celebrated tenure as CEO of the Investment Company Institute (ICI), laid out the subject well in a keynote address. He rightly pointed out that the Federal Reserve intervened to support the entire financial system. The Money Market Mutual Fund Liquidity Facility (MMLF) was just one of eight programs the Fed launched and was “dwarfed by other Fed actions.” He added that, “When usage of the MMLF was at its peak on April 8, that facility accounted for only 2.7% of the expansion of the Fed's balance sheet.”
The fact that policymakers had to rescue nearly every part of the financial sphere hasn’t stopped many pundits from—again—making money funds the scapegoat. Yet it was the broader market, especially both commercial paper and CD primary- and secondary-market trading, that froze. Banks and dealers didn’t make markets with their own paper, let alone that of other firms. That was unprecedented. The focus must be there. Stevens and Federated Hermes argue that money funds actually alleviated the pressure. All funds were able to provide daily liquidity with a market rate of return at par. Not a single fee was levied or a gate shut. No clients were unable to redeem shares. Our hope is that regulators will realize the money fund reforms of 2016 didn’t address the source of the problem, but rather a symptom.
The future of the cash-management sector is not just about the past. Plans to enhance access to it both across the globe and through an expanded window of time through new technology are just some of the positive developments. The shift from the London interbank offered rate (Libor) to the Secured Overnight Financing Rate (SOFR), while rocky, is progressing and will leave the industry with a stronger, more reliable and more trusted system.
As for the near future, after the election is decided we expect some measure of fiscal stimulus. This should bring a wave of Treasury bill issuance to fund stimulus checks, action that could offer relief to short-term rates. For now, the Treasury and Libor yield curves remain fairly flat, and SIFMA, while rising slightly over October, has been holding fairly steady. We kept the weighted average maturities of our funds in our target ranges of 35-45 days for government and 40-50 days for prime and municipals during the month.