The first quarter of 2020 was focused on one thing: COVID-19. As media stories developed, risk markets sold off, closing the quarter with the expectation that a global recession was well underway and unemployment levels could surpass those reached during any economic downturn of the last 40 years. Central banks around the world implemented an unprecedented amount of monetary stimulus while central governments followed with massive fiscal stimulus to try to stave off what could be the largest economic shock in a century. The question for the markets is how much impact central bank and government action will have? And how long will the virus’ ramifications last? It might not be the number of rate cuts or level of rates for certain economies and companies, but simply the lack of demand and revenue to support the infrastructure of an economy and business. It might not be the amount of fiscal stimulus that is injected into certain economies but the retooling of those economies and how human behavior changes. If the contraction is sustained then disruption is inevitable.
So how has, and will, this impact your money market funds and the securities they hold? We have asked a series of questions that we hope ally your concerns and reassure you that money market funds remain safe, liquid and prepared.
- Has liquidity in the money markets changed over the past few weeks?
Liquidity levels in money market strategies have been very strong since the beginning of the year and have not changed materially over the quarter. There is increased caution in the market, as would be expected given the ‘risk off’ sentiment. Overall we are seeing improving conditions in market liquidity and high percentages of daily and weekly liquidity in cash strategies. We remain in constant communication with the broker/dealer community, monitoring conditions and evaluating market depth. As is prudent we will be cautious going forward. We will trim duration and continue to build liquidity as is appropriate for each strategy.
- Typically the holdings of a Prime money market fund are large banks. Are there any credit concerns with those institutions? Or any other credit concerns in the holdings of a money market fund?
No. We do not view Covid19 as a credit event. Despite the expectation of a deep global recession, and the uncertain duration of the impact of the exogenous shock of COVID-19, we remain comfortable with counterparty credit exposures in our Cash funds, based on our position in the creditor hierarchy and the confidence that we have in our approved investment counterparties to absorb macroeconomic stress in the near term. A key difference between the COVID-19 crisis and the 2008 Global Financial Crisis is that the current situation represents an external shock rather than systemic internal issue lurking in banks’ balance sheets. Banks on our credit approval list have strong levels of capitalization and liquidity, and are stress-tested every year to test the durability of their balance sheets under both economic and markets distress. We will continue to adjust specific parameters of our credit approval list (most frequently through changes in maturity restrictions for approved investment counterparties) based on the potential for credit profile deterioration over the near/medium-term.
- Have there been any unusual flows in your money market funds or across the money market fund industry?
Flows into money market funds, broadly speaking, have been positive for the past two years. According to Investment Company Institute, US registered money market funds’ assets are approximately $4.3 trillion in total, a gain of approximately $1.5 trillion over the past two years with the gains almost evenly split between retail and institutional flows. The month of March did see flows out of Prime strategies but nothing that would be described as a “run” on those funds. As a reminder, all money market funds are required to disclose daily flows as well as other key metrics on their website. Our fund flows can be found at ssga.com/cash/funds. We continue to remain in close contact with our clients in order to understand their cash flows and liquidity needs.
- Are there opportunities in the markets for cash investors? Should we be considering adjustments to our strategies?
Given the uncertainty presented by COVID-19 it will be important to remain vigilant and attune to market developments. As we have discussed with clients, now is the time to “stay in your lane.” In other words, do not make dramatic changes to your strategy or allocation based on crisis-related data and subsequent market developments. Your core strategy and allocations should have safe built into them in case of severe market shocks and disruptions. Please keep in mind, our cash portfolio management team has an average of 20 years of industry experience and our lead money market fund portfolio managers managed funds through the 2008 global financial crisis. Just as we have done during previous market dislocations, we will closely monitor market conditions and adjust our strategy decisions based on current events and analysis of potential future outcomes. The current markets are changing every day based on the extraordinary news flow and global monetary and fiscal policy measures. We will continue to be disciplined about managing our strategic durations and credit exposures while ensuring we have appropriate liquidity in all our cash strategies.
- What risk controls do you have in place? Are your funds stress tested?
We have multiple levels of controls and risk monitoring across our entire asset management business, as well as specifically for our money market funds and cash management group. Our trade management system has pre- and post-trade compliance checks and reporting. Any violations are immediately escalated to management for resolutions. Our risk management team provides daily monitoring and monthly stress testing of cash strategies to ensure the appropriate levels of risk are managed and controlled in the strategies. A variety of risks are monitored including, but not limited to: duration, region, sector, ratings and cash flows. On top of our internal controls there are external controls provide by the ratings agencies that provide AAA-ratings for all our SEC registered 2a-7 money market funds. Our website discloses key attributes of each fund we manage including but not limited to: net asset value, total assets, weighted average maturity, weighted average life and holdings.
We hope the above has answered any questions or concerns you have. These are uncertain times and we strive to provide the most transparent and forthright information as possible. Do not hesitate to reach out to your State Street representative with any questions.