logo
Search by 
printer_ico

Kyongsoo Noh, CFA
Portfolio Manager, Global Liquidity
Ben Ford
Head of Global Liquidity Sales, ASEAN and Australia

Money in motion

Posted on June 8, 2017

 

Squeezing extra yield from US dollar cash has become a little more rewarding (and dare we even say exciting?) now that, for money market funds in general, the Federal Reserve (Fed) is raising interest rates and, for prime funds[1] in particular, the U.S. Securities and Exchange Commission (SEC) has implemented money market reform.

Due to near-zero interest rates and massive quantitative easing programmes over the last decade, money markets funds had not been as attractive as bank deposits for a number of market participants. Now, however, this situation is changing. Some of the reversal is due to changes in money market fund yields; some of the reversal is due to Basel III regulation, which has caused banks to shed a significant amount of non-operational overnight and short-term deposits (Exhibit 1 and Exhibit 2).

In December 2015, with labour and inflation indicators moving towards targets, the Federal Reserve initiated the process of normalizing monetary policy, raising interest rates for the first time in almost 10 years. Since then it has hiked twice more, most recently in March of this year (Exhibit 3). Prior to the first hike, government money market funds[2] yielded close to 0%. After three interest rate hikes, they now yield approximately 0.70%, which is a lot more competitive.

In October 2016, the SEC introduced US money market industry reforms, requiring institutional prime funds to implement liquidity fees and gates in times of stress and to float their NAV. These changes caused hundreds of billions of dollars to switch from prime funds into government money market funds. As a result of this flow of funds, the approximate yield differential between prime funds and government money market funds went from 10 basis points (bps) in late 2015 to 35 bps today. At about 1.05% yield, prime funds may now represent a very attractive option for cash investors vs. government money market funds and bank deposits.

A rising rate environment benefits low duration strategies, particularly money market funds—as discussed in J.P. Morgan Global Liquidity’s “Rising Rates” white paper[3]. Compared to history, however, the current pace of hikes is relatively slow, which means a small amount of extra duration has enhanced returns without adding a significant amount of risk. In fact, the sweet spot for front-end investors in this hiking cycle has been in ultra-short strategies, which have a yield of between 1.2% and 1.6% while targeting a weighted average duration of about half a year.

With this in mind, US dollar money market funds and ultra-short strategies appear increasingly attractive, the former as a vehicle for liquid cash and the latter as a way to effectively shorten duration risk while maintaining a decent risk-adjusted return. With so much front end cash in motion, what strategies will you choose?

 

[1]Prime funds are money market funds governed by Rule 2a-7 of the Investment Company Act of 1940 that can invest in both government and credit securities.

[2]Government money market funds are money market funds governed by Rule 2a-7 of the Investment Company Act of 1940 that can only invest in government securities.

[3]‘Rising Rates; managing liquidity through periods of rising interest rates’, J.P. Morgan Asset Management; as of 30 September 2013.

Posted in ,.Tags: , , , , .

Visit our Global Institutional website

NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional/wholesale/professional clients and qualified investors only as defined by local laws and regulations.
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. J.P. Morgan Asset Management does not predict outcomes of any political events, nor do we voice firm-wide opinions on any political candidates.
 
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA; and J.P. Morgan Investment Management Inc.
 
Copyright 2018 JPMorgan Chase & Co. All rights reserved.