(MENAFN- Gulf Times) In a global financial environment dominated by negative interest rates and central banks signalling even more accommodative policies, the US money-market industry is thriving.
Normally seen as a place to park cash during times of uncertainty, taxable funds have seen roughly $136bn of inflows this year even with US equity markets surging and bonds posting positive returns, Investment Company Institute data show.
Overall assets have swelled to more than $3tn, the highest level since the financial crisis.
Demand is being aided in part by attractive US short-term yields relative to bank deposits helped by three years of Federal Reserve interest-rate hikes, an inverted yield curve and volatility in financial markets.
Total assets in government money funds are at a record high and investments in prime funds are the most since September 2016, before industry reforms went into effect.
While the spectre of Fed rate cuts is not perceived as an imminent threat, it will be a topic among attendees at the Crane's Money Fund Symposium in Boston.
Other issues likely to come up include the drop in yields and narrowing spread between government and prime money-market funds, as well as the post-reform growth of the market for repurchase agreements and popularity of sponsored repo.
'Money fund yields are still above 2%, whether it's government or prime, said Pia McCusker, the Boston-based global head of cash management at State Street Global Advisors Trust Co. 'That's still attractive to investors today. If people are looking for a safe haven, cash is still a great place.
The yield on two-year Treasuries have dropped almost 74 basis points to 1.75% this year.
Now that the Fed has scrapped the use of 'patient when describing its approach to monetary policy changes, derivatives markets are pricing in more than 25 basis points of easing at the next Federal Open Market Committee meeting in July.
Yet fund managers are nonplussed given that money rates are still more attractive than bank deposits.
Historically, money funds tend to see outflows one to two years after the Fed cut rates, according to Alex Roever, head of US rates strategy at JPMorgan Chase & Company.
After a series of risk-off events in 2007-2008 that pushed investors into money funds, the Fed cut interest rates to zero, which crushed money-market yields and investors pulled cash in search of higher-yielding assets. 'It wasn't the fact that they had to cut rates, Roever said.
'It's that the overall level of rates got so low in that scenario. Another issue that could arise is whether the Fed decides to introduce a tool to keep money-market rates under more control.
Rates for repurchase agreements a key component of short-term funding markets have recently shown a tendency to spike around month-end, which has helped to pull the fed funds rate higher.
Fed chairman Jerome Powell said at his post-meeting press conference last month that the central bank will look at the idea of a so-called standing repo facility at a future meeting.
Even as money funds remain attractive investment vehicles, the drop in yields will be a topic of discussion.
After peaking at around 30 to 35 basis points in December, the spread between prime funds which invest primarily in commercial paper, certificates or deposits and time deposits and government funds has collapsed to around 20 basis points, according to State Street's McCusker.
Part of that is related to commercial paper issuance and where financial institutions are choosing to issue. So far this year, there has been an average 21 issues of AA rated CP longer than 81 days on a typical day, Fed data show.
That is down from an average of 28 issues during the same period in 2018. This dearth of supply 'bleeds through to Libor settings being lower and overall yield being lower on prime funds, Roever said.
Given the growth in government money fund assets after the 2016 reforms were enacted, the repo market has expanded to keep up with the increased demand. Dealer repo with money-market funds has risen to $1.2tn as of the end of May, Office of Financial Research data show.
That's because of the growth in sponsored repo, which are transactions where dealers sponsor non-dealer counterparties onto Fixed Income Clearing Corp's (FICC) cleared repo platform.
Last month, money fund cash invested in cleared repo jumped to a record $154bn, according to OFR, up from about $5bn in June 2017 when funds first started participating.
Barclays Plc strategist Joseph Abate expects sponsored repo volumes to grow, though 'it's difficult to project how popular the programme will become, he wrote in a note published on June 19.
'How much single counterparty exposure to the FICC does a money fund wish to have? 25%, 50%, or more?
MENAFN2406201900670000ID1098680659
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.