Money Market Funds Provide Opportunity in Volatile Markets

The U.S. Federal Reserve cut its short-term benchmark rate 50 basis points on March 3rd to a range of 1.0% to 1.25% following an off-schedule meeting that caught market participants by surprise. It was the Fed’s first unscheduled cut since the financial crisis.

The move was uncharacteristically preemptive to buoy markets before the full impact of the coronavirus could be felt on the U.S. and global markets. Unlike this cut, reductions in 2008 and after 9/11 in 2001 were reactive. In its commentary issued on March 5, Fidelity Investments explains:

For policymakers, stepping in early to try to stem further volatility may have been one of the lessons learned from the financial crisis. However, the market reaction to the cut will put the Federal Open Markets Committee (FOMC) in a challenging position given the already low level of rates. Further rate cuts may be welcome to the financial markets but may not help industries and supply/demand dynamics that are focused on the spread of the coronavirus. Markets are pricing in two additional 25-bps cuts to the fed funds rate by the FOMC’s July meeting.

From ICD’s vantage point as an independent portal provider for corporate treasury organizations investing in money market funds and short-term instruments, we are seeing clients moving assets away from lower-yielding bank products into money market funds to pick up yield. As highlighted in the chart below capturing the FOMC’s last rate reduction, we can see the delayed impact on money market fund yields as compared to the Fed Funds Rate.

Federal Reserve Rate Cut Money Markets
Sources:MoneyNet Fidelity Data and MoneyNet Fidelity Data

ICD CEO Tory Hazard gives this historical perspective:

With past rate reductions, ICD has seen corporate investors commonly use the opportunity to gain yield in money funds, as there is a lag effect from the fund’s weighted average maturity (WAM) generally taking 30-45 days to normalize to reduced rates. Supporting this trend in ICI’s March 5th fund report, institutional money market fund assets increased $20 billion. This increase further validates the perceived safety, security and liquidity of institutional money market funds in times of market volatility.

This is also the consensus from ICD’s discussions with its broad family of fund partners and portfolio managers. One fund partner indicated that institutional investors can look to daily and weekly liquidity for guidance on how quickly Prime Funds will reset, and commented: Historically money market funds have experienced inflows during these events as clients either park cash in money market funds due to a risk-off event or take advantage of the slower reset to new rates.  When you consider the 10-year Treasury is now yielding a little over 1%, MMFs are very attractive.

Independent Trading Portals: Avoiding the Hidden Risks of Bank Portals

Treasury professionals understand the language of risk.

This includes financial risks, reputational risk, and cyber-security risks that can affect their operations.

Treasury teams must also be especially aware of the inherent risks and exposures within their systems and processes.

That’s why the largest, most sophisticated treasury departments are exploring independent treasury portals to meet their needs. A recent survey found that around 37% of organizations with revenues exceeding $1 billion expect to use non-traditional vendors for treasury services in the future.

Non-traditional vendors, in this case, include “vendors other than banks that are offering niche services…” Firms interested in these independent portals cite flexibility and adaptability (58%) and specialized expertise (51%) as top reasons to switch, followed by customization (31%), lower costs (30%), better customer service (21%), and cutting-edge technology (17%).

But treasury is notoriously risk-averse, and many still rely on bank-owned portals because they have a long-standing relationship with the bank. Nonetheless, there are three hidden risks in bank portals that organizations can avoid by using an independently-owned portal.

Hidden risk of bank portals #1: Leverage

Treasury departments that use bank-owned portals give those banks access to their entire network of internal and external cash management relationships.

This reduces the treasury organization’s leverage in demanding reduced fees or other concessions from the bank-owned portal. The bank will often counter by asking the treasury department to move additional assets to their funds.

An independent portal, on the other hand, gives treasury professionals real-time visibility into all their funds, and flexibility to share their information with whichever banks they so choose – and with any vendors that are part of their treasury workflow. An independent portal also provides unbiased access to hundreds of funds without any pressure to choose one over another.

Hidden risk of bank portals #2: Difficulties in integrating with existing systems

Teams that manage independent portals, by contrast, are used to working with different third-party technologies. They know how to integrate their platform into the broad market of treasury technology providers, and how to maximize the workflow efficiency of the total solution set. They are focused solely on meeting the needs of customers.

Before signing on with any portal provider, get a sense of the integration process by asking about how many times the bank has integrated to the technologies used to support your treasury operations.  Ask to speak with other clients with similar technology configurations to the systems used by your organization. Inquire what technology resources will be responsible for putting the integration in place and who will maintain the connectivity after the portal is live.

By talking about these issues early in the selection process, treasury professionals can get an idea of how easy, or disruptive, the portal setup will be.

Hidden risk of bank portals #3: Obsolescence

Treasury technology is evolving fast. Cutting-edge platforms already integrate AI, machine learning and robotic process automation (RPA) into their services. But technology is expensive, and portals are never a bank’s primary revenue stream. As a result, the parent company may be slow to invest in technology. This may result in functionality that is out of date or lacking key capabilities.

For example, one technology platform is still unable to calculate floating NAV for money market funds—even three years after money market reform.

Independently-owned portals invest in technology continuously because the portal is their only business. They often release enhancements multiple times per month and treat client feedback as business imperatives.

Independent portals continue to innovate as new technologies and market challenges emerge. The idea is to develop a platform that not only works well today but can be adapted to meet clients’ needs going forward.

Independent portals can future-proof treasury functions, so that no matter how markets, regulations, or technology change, the treasury department can continue to support corporate objectives.

Independent portals reduce treasury risk

Using a bank-owned portal may seem like the path of least resistance, especially when treasury departments have long-standing relationships with the institutions that own them. Sticking with a familiar solution may seem sensible, but, in fact, it exposes treasury groups to additional risks.

Independent portals reduce those risks with unbiased market access, streamlined integration, customization, and a commitment to continuous innovation.