Treasury Today published, "MMFs in a falling rate environment," which tells us, "​Around the world, the much anticipated rate-​cutting cycle is underway.... So, what does the falling interest rate environment mean for money market funds? Paul Mueller, Head of Global Liquidity EMEA portfolios at Invesco, points out that the onset of the current cutting cycle was largely anticipated, which has allowed money market funds (​MMFs) to extend their weighted average maturities to help protect returns against declining yields." Mueller tells the publication that "for MMF managers, the decision to include longer-​term securities -- which are aimed at safeguarding yields from further rate declines -- requires accepting lower yields compared to those available through shorter-​dated securities. This decision can be hedged by investing in floating rate instruments, which may perform better if rates do not decrease as swiftly as the market anticipates." He says, "However, this creates a delicate balance: purchasing securities that may have already priced in excessive rate cuts could lead to sub-​optimal yields, while delaying the extension of portfolio maturities risks missing the chance to lock in favourable yields if rates fall more quickly than expected." The article also quotes HSBCAM'​s Joseph Little, "​On the face of it, lower policy rates pose a challenge for MMFs. Technical aspects, such as careful management of a duration ladder, can mitigate some of this. But the most important factor will be the shallow rate-​cutting cycle, which will bolster MMF yields." Treasury Today says, "​As Mueller explains, the structure of a typical MMF portfolio allows it to generally outperform bank deposits when rates are cut, as bank deposits typically have much shorter maturities. 'Investors are well aware of this dynamic, and during a rate-​cutting cycle, we often observe increased inflows into MMFs,' he observes. 'This influx can accelerate the rate at which MMF yields align with those of short-​dated bank deposits.'"

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