Although the markets may not have went out like a docile lamb, they certainly came in and acted like a very angry lion for the better part of the month. A surprise 50 basis point (bps) FOMC rate cut on March 3, followed by an unprecedented Sunday night, 100 bps rate cut to a zero lowerbound on March 15 set the tone. Major economic impact and a severe liquidity crisis were in full play, while garnering our, and the markets, rapt attention. The last time the FOMC had eased by 150 bps in 12 days was 1984, when they eased from 11.75% to 10.00%. Ten-year yields dropped from 1.00% on March 2 to 0.54% on March 9 before backing up to 1.19% on March 18. With this type of volatility, it is easy to understand why liquidity in the fixed income markets froze. Threemonth Libor versus 3-month Overnight Index Swaps (OIS) started the month at a 0.14% yield differential and ended the month with 1.36% of yield difference. The Bloomberg 3-month A1/P1 Commercial Paper Index was yielding only 10 bps over 3-month US Treasury bills at the beginning of the month but ended 125 bps over. The challenges were clear.
The good news: 2016 money market reform made a difference. The $1 trillion move out of Prime money market fund strategies and into Government money market fund strategies in 2016 mitigated flight risk in 2020. Over the course of the month of March, we did see $144 billion move out of Prime strategies while in September 2008 it was three times that much. For perspective, total outflows from Prime money market funds in September 2008 was 12% of total money market fund AUM versus 3% of total money market fund assets in March 2020. In September 2008, total money market fund assets shrank by $123 billion whereas in March 2020, total money market fund assets grew by $700 billion (this includes outflows from Prime). Institutional Prime net asset value (NAV) dropped, as would be expected, given the repricing of the credit markets. Meanwhile portfolio managers’ diligence utilizing a variety of sources of liquidity kept daily and weekly liquidity percentages above what was required.
NAVs improved in the final week of the month. The Federal Reserve announced 12 programs to enhance liquidity in the market:
- Central bank swap lines
- Commercial paper funding facility
- Money market liquidity facility
- Expansion of Open Market Operations to include 1w/2w/1m/3m
- Primary Market Corporate Credit Facility
- FIMA Repo facility (foreign & international monetary authorities)
- Discount window rate adjustment
- Primary dealer credit facility
- FIMA Repo facility (foreign central banks)
- Term Asset Backed Lending Facility
- Secondary Market Corporate Credit Facility
- Unlimited quantitative easing
While these appear to be an almost comical avalanche of monetary measures, it seems to be working. The yield on the Bloomberg A1/P1 3-month Commercial Paper Index has fallen 70 bps from its high of 2.00% to 1.30% at month end. The Bloomberg Barclays Industrial Single A floating rate credit spread has tightened back 90 bps from their wide levels mid-month.
Money market fund weighted average maturity (WAM) and weighted average life (WAL) moved around a bit over the course of the month. Average WAM for Government funds extended by nine days, with all the incoming cash needing to be spent out the curve. Prime fund WAMs dropped by three days, a move likening to defensive positioning. Government fund WAL at 106 days didn’t move but Prime fund WAL dropped by nine days, again in a defensive positioning move. Average Institutional Prime fund NAVs dropped by 10 bps over the course of the month but are up from their lowest prices by 4 bps on average.
Let’s hope April is warm and pleasant without too many showers so May brings us flowers.