Last week, we listened in on two webinars that addressed the difficulties corporate and money market investors are having in this overly oppressive regulatory and rate environment. GT News, a publication of the Association of Financial Professionals, hosted a free webinar with experts from SSgA offering their insights on cash management strategies. The webinar, "Cash Management in 2015 -- A Trinity of Challenges," was sponsored by SSgA and featured Yeng Butler, Head, US Cash Management as moderator, along with SSgA's Steven Meier, CIO-Global Fixed Income, Cash and Currency, and Tom Connelley, Head, Short Duration Solutions. "In the years since the global financial crisis we have seen sweeping changes in the operating environment for cash," said Butler. "Going into 2015, cash investors are faced with what we refer to as a trinity of challenges -- first, new landmark regulatory reforms, second, historically low interest rates, and finally, a shortage of high quality short-term securities in the market."
On his expectations for the cash market in 2015, Meier says, "Certainly the global cash markets have been interesting and somewhat challenging since the outset of the global financial crisis. We've seen an unprecedented amount of central bank innovation to support growth and address inflationary pressures; we've seen regulatory adjustments on a scale not experienced in our lifetime; and we've endured an extended period of global market repair which is ongoing and is in different phases around the world."
Looking ahead, he comments, "Our outlook for the cash markets around the world is a balance of both optimism and reality. We like to think of ourselves as optimistic for continued economic improvement and eventual rate normalization across the globe. We're also realistic in recognizing the process of repair is ongoing and there are a number of events that could certainly derail the global or local economic recoveries. The recovery in global markets today is still very fragile."
However, he does expect to see some divergence in the U.S. "We're part of an integrated global economy. But we're a pretty sizable market so I do think you'll see divergence in terms of decoupling of both the US and the UK market from the pace and policy that we see in say Europe and Japan. We do see a strengthening US market, a strengthening UK markets, and we don't see that carrying over into Europe and Japan -- we're at different stages of economic repair. Economic policy will ultimately drive monetary policy-- which is why we focus on this divergence."
In terms of trends in 2015, Meier explained, "I still think we need to adhere to the three core objectives -- the safety of principal, liquidity, and yield relative to the mandate and relative to risk tolerance. From a credit quality standpoint, only buy strong credits. It's interesting to note that the regulatory changes and issuer preferences have pushed investors into marginal credits to find yield and capacity. We certainly resist that at all costs."
He added, "We think that rates will move higher in the latter part of 2015. I think those hikes will be well telegraphed, well priced in, and very gradual in nature, so I don't think you need to be so concerned about the amount of interest rate sensitivity in portfolios." He continued, "I'd say the sweet spot for short end investors now is in that ultra-short bond fund space at 1-3 years where there's product availability associated with yield as well."
On the impact of money market reforms, Meier said, "I do think, as we move closer to money market reform [implementation is October 14, 2016], we'll see the potential for outflows from prime institutional funds ... perhaps 25-30% outflows into government only and Treasury funds. I do think credit will cheapen up -- there will probably be decent demand inside of 3 months but a little further out on the curve you'll see credit spreads widen and an opportunity for yield pickup for investors."
Connelley talked about some cash management challenges. "Due to regulatory factors, there's currently a very high cost of liquidity in the extreme front end of the yield curve with this supply and demand imbalance where short high quality assets trade at extremely low yields." He said, "It's getting very hard to find high quality bank liabilities for money funds inside of three months."
He continued, "We urge cash investors to take a good look at their liquidity needs in order to minimize the yield drag that is associated with the access to 2a-7 style liquidity." In terms of adding return, Connelley said it may be necessary to take thoughtful and moderate risk. "In most environments, the extension of duration and maturity will help investors realize increased yield."
The push-pull that Basel III and money market reforms will have on corporate treasurers was among the topics discussed during a webinar held by SunGard Financial Systems last Tuesday. The webinar took a deep dive into the results of its fourth annual "Corporate Cash Investment Study," which we covered in our Nov. 5 News, "SunGard: Lack of Suitable Cash Repositories Biggest Concern of Corps." The survey found that 31% said the "Lack of suitable repositories for cash" was the greatest concern, while about 62% said it was one of the top 3 concerns. In terms of asset allocation trends, "Deposits remain the most commonly used instrument, noted by 80 percent of respondents, an increase of 7 percent since 2013, while CNAV MMFs were second used by about 47%. During the 45-minute webinar, host Maryum Malik, director of SunGard's global trading business, and guest speaker Helen Sanders, director of Asymmetric Solutions Limited, shared insights on how managers can improve their short-term cash investment strategies.
Sanders said that while treasurers haven't really changed the instruments they use to invest cash, they are thinking ahead and starting to adapt new policies and investment strategies given the shifting landscape. "Regulations will have a major impact over the next year or two on cash investment policy and I don't think that's yet reflected in these figures," she said.
"More important than the money market fund regulation is Basel III. The implications of Basel III can't be underestimated. As they start to take effect over the course of the next year or so. The main reason, certainly looking from a cash investment perspective is, as we've already noted, 80% of respondents are using deposits as their primary cash investment instrument. Looking ahead, because of the LCR, banks are not going to be particularly interested in deposits of less than around 90 days. It will be a major change. They are not necessarily going to take them, so companies are going to need to find an alternative," said Sanders.
Combined with MMF regulations, there is an interesting dynamic going on, she added. "Then you have money market fund regulations, which in some respects might push some companies away from money market funds while Basel III does the opposite simply because deposits are going to be less attractive to banks than they have been in the past. There's slightly contrasting implications of money market fund reform on one side and Basel III, perhaps more importantly on the other."
