The month of February proved more volatile and unpredictable than January as Russia’s war on Ukraine caused major uncertainty and de-risking in equity and credit markets. This commentary will not focus on the headlines around that conflict as the news flow is fast and changing by the hour. Instead we will focus on the cash markets and what impact the volatility is having on money market funds and other cash investments.
At the time of this writing, our money market funds remain highly liquid with both WAM and WAL shorter than our one year historical averages, and slightly shorter than certain peers. See composite levels in Figure 3. Liquidity positions are high and well above regulatory requirements as money market funds build short term maturities in expectation of the upward policy rate move and heightened geopolitical concerns. Our positioning for a Fed rate hike has been beneficial in the current geopolitical environment; this heightened volatility and ‘risk off’ move in the money markets increases the need for ready liquidity. At the time of this writing, the chance of a 25bps rate hike at the March 16th FOMC meeting is 100% priced in with Chair Powell confirming in his prepared remarks to congress. It should be noted that with the war continuing to escalate, there is less certainty around specific future central bank policy adjustments as policymakers adopt a more cautious “wait and see” approach.
Short term (1-3 month) credit yields (commercial paper and certificates of deposit, as measured by three different indexes: LIBOR, BSBY, Bloomberg CP) have gradually moved up over the course of the month and do not appear to be moving dramatically higher due to conflicts in eastern Europe.
Source: Bloomberg, March 8, 2022
But there is more to the market dynamic than these indices reveal. Liquidity is strained and dealers are exercising caution in positioning paper given the uncertainty in the market. One-year index rates (same indices as noted above) are reflecting more volatility in their yields. Liquidity in longer maturities is reduced and investors are being very particular about what they buy given the volatility in those rates. One year OIS (Overnight Index Swaps) and one year Treasury Bill yields have fallen from their highs, but are also showing higher levels of volatility.
Source: Bloomberg, March 8, 2022
Markets will continue to be volatile over the coming months as the war develops and outcomes remain uncertain. Our heightened focus on liquidity and our cautious approach to markets will remain the top priority.
Source: SSGA, Fund Families, Bloomberg, as of March 8, 2022
Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Disclosure related to each of the State Street Institutional Liquid Reserves Fund and the State Street ESG Liquid Reserves Fund: You could lose money by investing in the Fund. Because the share price of the Fund is expected to fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Global Advisors, Inc.. The Fund pays State Street Bank and Trust Company for its services as custodian, transfer agent and shareholder servicing agent and pays SSGA Funds Management, Inc., an affiliate of State Street Bank and Trust Company, for investment advisory services.
Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. Click the link to obtain a prospectus or summary prospectus which contains this and other information, or by calling 1.877.521.4083. Please read it carefully before investing.
You should obtain and read a Key Investor Information Document and Prospectus relating to the SSGA Cash funds prior to investing. Further information, including the annual and semi-annual reports and the Key Investor Information Document and Prospectus describing the characteristics, charges, expenses and risks involved in your investments are available for residents of countries where SSGA cash funds are authorized for sale, at www.ssga.com/cash and from your local SSGA office or by calling +44 (0)20 3395 2333.
Investing involves risk including the risk of loss of principal. It is possible to lose money by investing in the funds.
Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. Click the link to obtain a prospectus which contains this and other information, or by calling +44 (0)20 3395 2333, please read it carefully before investing.