A webinar hosted recently by Fitch Ratings and online money fund trading "portal" Treasury Partners called, "Changing Cash Management: Are You Ready?" looked at how the process of managing cash is evolving due to money market reform and other changes. Panelists Ian Rasmussen, a Senior Director at Fitch Ratings; Jerry Klein, a Managing Director at Treasury Partners; and Ben Montes, Client Services Team Lead at Clearwater Analytics, discussed a range of topics related to MMFs, including the development of new products, low or negative yields, liquidity, spreads, and Prime to Government flows. Said Fitch's Rasmussen, "Money fund regulation is pushing investors to reconsider what they want to invest in, which is pushing managers to develop new options, so there is a whole slew of new products coming to market." (Note: Safe travels to those heading to this week's Crane's Money Fund Symposium, which is June 22-24 at the Philadelphia Marriott. The Conference Binder will be sent to the record 540 Attendees this morning, and it's also now available to registered Attendees and Subscribers at the bottom our "Content" page. We look forward to seeing many of you in Philly later this week!)
Treasury Partners' Klein explains, "One of the trends we've seen ramping up with our clients over the past 18 months is that they're more actively looking to segment their cash." This trend, among others, is resulting in the development of new products. Klein presented a chart listing some of the available options, including bank deposits, structured bank deposit products, private money funds, ultra-short bond funds, separately managed accounts, short duration ETFs, time/certificates of deposit, direct investment in money market securities, Retail Prime MMFs, Inst Prime MMFs, short maturity Prime MMFs, and Government MMFs.
One of the areas of increased interest is Private funds. He commented, "Private money market funds are funds that look very similar to the prime 2a-7 funds and AAA-rated prime funds of today in that they seek to maintain a one dollar NAV. They generally are looking to operate under the same guidelines as current 2a-7 guidelines; however, these are non-registered products." However, he said, they face the hurdle of not being included in most corporate investment policies.
Klein explained, "Ultra short bond funds and short duration ETFs have been around for some time, but we are hearing more about them from our clients and from the fund companies. The view from part of the industry is that if investors are going to get comfortable with floating NAV money market funds, they may also look to these ultra-short bond funds, which will have a slightly higher yield." But they also face the hurdle of investment policy acceptance.
In the money fund space, he told the webinar audience, "This is where we're seeing massive changes coming in October. We are constantly having conversations with our clients about whether they expect to stay in prime funds or move to government funds or other types of products. I think there's been a shift over the past four or five years since this discussion first got going. At that point in time the consensus was clear that floating NAV would drive most corporate investors out of prime funds. As corporate treasurers have had some time now to evaluate the data, learn more about how this product will work, we're seeing more who will actually continue to use prime funds."
Klein continued, "But we still expect some significant migration into Government funds, particularly from our clients who are looking for a lot of intraday liquidity." Rasmussen concurred that the concern has shifted from floating NAV to fees and gates. "The one [concern] that investors are focused on now is liquidity fees and the redemptions gates," he said.
Klein also commented, "We've been seeing for some time now that fund managers are clearly building liquidity inside of their funds.... It's becoming a little bit of a tougher trade-off right now because the curve is a little bit steeper than it has been.... However, in general fund managers are still going to err on the side of caution and try to stay as far away from that 30%, 7 day liquidity zone as possible." He said managers are generally running between 40% and 50% in 7-day liquidity, so they are nowhere near that 30% level that could potentially trigger the gates and the liquidity fees."
Rasmussen discussed asset flow trends. "What we've seen, which isn't a surprise, is that government funds have increased in assets ... while Prime funds have declined in assets. A lot of the asset flows thus far have been from managers deciding to proactively re-categorize or change a prime fund to a government fund.... We do anticipate that there will be more flows at some point over the next couple of months; we just don't know when that will take place. I guess investors are feeling fairly comfortable in their prime fund given the benefit that it offers them now."
He continued, "The million dollar question is: How much will move? The numbers are all over the place but we'll be watching this very closely over the next couple of months. Part of the story will be how much investors are paid to stay in prime funds."
Klein asked, "What spread would make it attractive for an investor to stay in a prime fund with a floating NAV as opposed to going into a government fund with the stable NAV?" He provided some historical data, saying that in the years leading up the 2008 financial crisis, the spread was generally in the 10 to 15 basis point range. After that, when the Fed lowered rates to near zero, the spread sank to about 5 basis points. "Since the Fed tightened in December, we've seen that spread climb significantly to where it's now over 20 basis points, so it's a meaningful differential for a lot of investors. In fact, now you get about twice the return in a prime fund as you do in a government fund."
He added, "Will that go up from here? I think it is likely we will see a little bit more widening as there is increased demand for government paper and a little diminished demand for corporate paper. It should cause some spread widening between prime and government funds. The other part of that equation is what the Fed will do between now and then. If the Fed does in fact make a move over the next few months -- that would likely add to some spread widening as well."
In the Q&A portion of the webinar, Klein was asked when investors will move out of Prime. He said, "Many of them are still waiting to take action. I've had only one client so far that has moved from Prime to Government funds. I've had some others who have told me they will be making that move, and many who are still a undecided on this." He believes that most clients will end up with a combination of both Prime and Government funds.
Finally, another audience member asked if the 30% liquidity threshold will create an unnecessary trigger for investors? Klein said, "I think it's certainly a concern that some investors will hyper-focus on that liquidity number. The real result of it is that it is basically going to force managers to maintain more liquidity than they would otherwise ... and perhaps forgo some yield in doing so ... knowing that they are not coming close to that 30% threshold. I think you'll see fund managers basically do everything in their power to avoid getting into that position."
