Viewing the forest
The money market industry is too focused on the trees.
It’s time for some perspective about the money markets. The historic upheaval in our health and the economy has driven the financial sphere to an almost absurd speed. On occasion the deliberate pace of liquidity products has moved in double time. This new course of business has most of the industry stressing out whenever a new issue arises. Of course, diligence is paramount. But looking up to survey the landscape also is warranted.
Lately it seems many in the financial industry have forgotten we are in a global pandemic, instead viewing troubling events as the acceleration of trends perceived before the coronavirus arrived. A few moves within the money markets, such as some fund closures or shifts, have caused concern about the entire space. But it is natural that the seismic shock would lead some firms to make decisions they hadn’t considered pre-Covid. The real story is how money funds showed their mettle in the dark days of March and that they have served investors well ever since.
For all the worry about the prime space, industry assets are only down slightly over 6% this year. A sizable portion of the outflows stem from typical activities, such as investors moving excess cash they put on the sidelines for riskier bets or businesses withdrawing money for operations. Without prime funds, corporations and banks would have to find other funding sources, likely at a higher cost, and investors enjoy the attractive yields relative to deposit products. Prime will remain a player.
Government product yields should rise when Congress passes a stimulus package (which it will eventually) and when the pandemic’s conclusion reverses the massive flight to safety. And the industry reorganization in the municipal market is related to the changes in the tax code, which is always subject to political winds. Yields here are elevated, and supply will not be an issue—not when many states likely will increase issuance even if they receive more federal aid.
The point is, short-term conclusions and long-term speculation are suspect at the moment. Many economic indicators lack credibility. Managers keep an eye on hospitalizations as much as, say, housing.
Inflation also should be seen as residing in this camp. The Federal Open Market Committee’s projections released last month forecast that core PCE inflation will remain below 2% until 2023. There is little question that the tragic job losses will keep consumer spending, and hence inflation, down in the near term. But the trade war was disrupting supply chains before the advent of the coronavirus, and it is possible a vaccine could lead to a swifter rise than many expect. And exactly what is the Federal Reserve's definition of “some time” in its newly announced allowance of inflation to overshoot 2%? Even the deluge of policymaker speeches last month couldn’t answer that.
Clearly I am an advocate for the money market industry, and Federated Hermes is a leader in liquidity management. But everyone brings their own bias, and taking a step back to see the bigger picture is something all should do.
With the Treasury and London interbank offered rate (Libor) yield curves remaining flat and SIFMA 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.