Prime money market mutual funds are once more on the ropes, Fidelity just closed certain of its treasury money funds to new investors, and many government funds are holding repos, which have their own associated risk. While not yet quite a repeat of 2008, where credit events led to the Reserve Primary Fund breaking the buck, liquidity, NAV uncertainty, and access to funds are creating even more uncertainty that treasury professionals must navigate.
Fortunately, moves by the Federal Reserve and the US Treasury to facilitate liquidity has staved off any major disasters thus far. However, the money market fund (MMF) reform measures that were deemed so important to the industry are now proving to be meaningless.
Propping up money fundsâ€¦again
Recently, Goldman Sachs pumped in $1.8bn to fortify two of its money funds, BNY Mellon backstopped a Dreyfus prime fund, and it's New Jersey Municipal Money Market Fund officially broke the buck. A small fund, but psychologically important, nonetheless, that sends a warning shot across the bow of the industry.
Couple this with an arid repo market and we find ourselves facing similar threats to those of a decade ago. It's no longer business as usual and as such, treasury professionals should become familiar with all available options for operating cash.
Pivoting from a return on principal concept to a return of capital discipline
â€œNo treasury professional ever got fired for decreasing risk,â€ says Brandon Semilof, Managing Director at StoneCastle Cash Management, provider of the Federally Insured Cash Account (FICA), which provides up to $125 million in federal insurance per tax ID on operating cash balances. â€œMoney fund reforms have failed and the intervention by the government shines a bright light on the widening cracks inherent to certain of these funds.â€
The need for treasury professionals to diversify their core and strategic cash is once again being heightened at a time when options are diminishing. Thanks to their relative safety, US government and Treasury MMFs have seen significant subscription activity in recent weeks – but now investors are looking closely at how zero and negative Treasury rates will affect their portfolios and if new subscriptions will further diminish returns.
In an environment where certain MMFs are again forced to waive fees to keep investors earning at least one basis point, the next step is the reality of halting subscriptions as each dollar in drives revenue further below breakeven.
Despite the backstop from the Federal Reserve, the pervasiveness of uncertainty is touching every asset class, including cash. The key for treasury professionals is to stick to the fundamentals of diversification and stay consistent with their investment policy of absolute safety and liquidity as their most important tenets. Keep the company's life blood liquid and keep it safe. â€œWith prime funds' rates falling dramatically coupled with the capital backing some have received, it creates an absurd risk/return dynamic in the context of the reform,â€ adds Semilof. â€œWe are out with a simple message to our clients regarding the importance of maintaining absolute preservation and liquidity of what is supposed to be a riskless asset class.â€