March Money Fund Madness

March Money Fund Madness

While markets returned to a relatively normal state by late April and early May, events in March bordered on irrational. Volatility had reached the highest levels in decades. As the impacts of the novel coronavirus began to sink into the financial markets and into the heads of corporate executives, markets went “risk off”.  Tellingly, the yield spread between Prime money market funds and Government funds widened significantly, from 12.5 bps to 47.4 bps at its peak.

Corporate treasurers drew down credit lines and poured cash into Government and Treasury money market funds.  But that 47.4 bps spread wasn’t enough to get corporate investors back into Prime, which they exited beginning on March 16, when the U.S. Federal Reserve cut rates to near zero.

7 Day Yield on MMFs (%)

ICD worked with The Carfang Group to analyze the aggregated trading activity of its nearly 400 clients during the period between March 2 and April 8. ICD clients currently manage more than $215 billion in average daily balance on ICD Portal and represent companies of all sizes across every major industry. As such, the data represents over 110,000 positions, providing an illuminating perspective on what happened. The analysis reveals that money market funds as an asset class performed flawlessly, providing ICD clients with daily liquidity at market, even as investor emotions led them to de-risk.

“A traditional analysis would have led you to put all your money into Prime, but with risk driving decisions, just the opposite happened,” says Tony Carfang, managing director of the treasury strategy firm, The Carfang Group.

By late March, ICD clients were adding assets to their Government holdings, increasing flows by 117%. “If only $10 billion of that increase had gone into Prime, those investments would have earned an additional $830,000 each day,” Carfang says.

Not that Mr. Carfang would have advised his clients to put all their money into one fund type. Rather a balanced portfolio would not have excluded Prime from its investment mix.

“I think the reason why Prime funds held up so well is because Government funds held up so well, and that took the pressure off of Prime,” says Peter Crane, CEO of Crane Data. “Because investors were bucketing their funds, they didn’t have to hit their liquidity so hard and so fast in the Prime space. They knew they had Government assets, and they were raising more assets. Money was flowing in.”

The funds provided customers daily liquidity at NAV for all of their funds. “Never was a corporate in jeopardy of getting their money back on the same day,” says Crane. “Most funds were far more liquid than required.”

Weekly Liquid Assets

During the analysis period, flows into Government and Treasury funds on ICD Portal rose 117% and 295%, respectively, while Prime assets fell 71%, albeit at a fairly even pace over a period of a week before bottoming on March 23.

Market Liquidity

“The biggest trend was the move towards liquidity, which almost gets drowned out by the concerns over Prime,” Crane says.

Following its emergency rate cut of 50 bps on March 3 and its 100 bps on March 16, the Fed took additional actions to bring confidence to volatile markets, bolstering liquidity with backstops for commercial paper and money market funds.

The chain of events began on March 10, when reports that possible business disruption and trading bottlenecks in the CP market threatened companies’ ability to pay back cash. The Fed acted quickly on March 17, restarting its Commercial Paper Funding Facility (CPFF), which it instituted during the global financial crisis. The CPFF allows highly-rated corporations to sell their CP directly to the U.S. Treasury, assuring they will be able to roll over paper currently held by money market funds. The next day the Fed also instituted the Money Market Fund Liquidity Facility, which provides guarantees to banks that purchase highly rated securities from money market funds.

“The rush from Prime seems to have been all about the headline risk,” Carfang says. “Effectively, financial assets of all types were being supported by the federal government, so instruments like Prime funds should have been priced much closer to the level of Government or Treasury funds, but instead the spread went up to 47 bps. That makes no economic sense.”

During that same week, the Bank of New York Mellon and Goldman Sachs added liquidity into their Prime funds by repurchasing assets. These actions were preemptive measures to ensure liquidity would stay above 30%, a threshold that requires fund boards to decide whether to impose fees or gates on redemptions, which neither institution reached. Market NAVs remained relatively stable over this period in March, and even Prime funds, which directly reflect stress in the credit market, maintained mNAVs of $0.99914 at their lowest, only a $.00086 deviation.

MMF Market NAVs

“These funds didn’t come close to breaking the buck, and no one triggered gates or fees,” says Crane. “So that’s a victory for Prime, and for money funds as a whole. Having diversity between funds and being able to move between them regardless of which bucket springs a leak is always a good idea.”

Another indication on the performance of money market funds as an asset class is its ability to absorb vast amounts of cash.  Through the five-week analysis period, the market was able to take in $782B in new assets.

A Look Back, A Look Ahead

Money market funds held up well, leading some to suggest that recent money fund regulations and policies did what they were supposed to do.  However, Carfang sees it differently.

“Upwards of $1 trillion left Prime funds following the regulations put in place after the global financial crisis, and, sure enough, it was the dearth of buyers in early March that led to the seizing up of the Commercial Paper markets and the resulting panic in the stock and bond markets,” says Carfang. Prime funds had been the largest purchasers of commercial paper.

So, what happened?

“I think it was a confluence of events that caused people to doubt the future and sell off everything in the stock and bond markets,” says Crane. “That happened, and then the same thing happened as in 2008, when even safe investments were scrutinized.”

Unlike programmatic trading at banks, or hedge funds that have rigid rules for portfolio trading, corporate investment policies are generally broad in nature, giving treasury organizations a wide berth in the way they allocate short-term assets.  When left up to human decision-making, the natural reaction in times of uncertainty is an additional bias toward capital preservation over that of yield.

“The human element is a major factor in what we saw in the days following the Fed’s March 3rd move,” says Carfang.  “The interesting trend we saw looking at the behavior of the ICD client base over the course of the analysis is the timeliness of their decisions versus those of the broad market.”

Growth of ICD Fund Assets vs. US MMF Total

Analysis shows that 88% of ICD clients trading on ICD Portal were logging into their portfolios every day. “These are very active investors, and I imagine that the availability of information ICD provides, proactively, and the function of the ICD Portal might actually make them better prepared to act,” says Carfang.

Comments from ICD clients during this time support this hypothesis, noting ICD’s analytics, their firm’s ability to easily move between funds, and the ability of ICD’s Global Trade Desk to find capacity for them across funds in the market.

So, where do corporate investors go from here?

“The spread versus the associated risks on Government and Prime funds represented a significant premium over those of Treasury Repo and Government Repo funds,” says Carfang.  “While emotion certainly played a part in the initial market moves, reason needs to guide investors going forward, given the assurances policy-makers have put in place to give confidence.”

“The old investment adage of the balanced portfolio is tried and true as corporate investors find footing while the COVID-19 market continues to unfold.”

The market, for now, has stabilized on all fronts. The government has shown its willingness to support all aspects of the market from a fiscal and monetary policy perspective, and professionals have settled from the chaos of moving on market events and moving their offices to their homes. Corporate investors are finding balance at work, at home, and in their portfolios.



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.


6 Questions to Consider When Choosing a Trading Portal

The world’s most sophisticated treasury departments today manage cash across various markets, asset classes, geographies, and in multiple currencies. The group’s central function is to manage cash and ensure it's available when the business requires. But, ensuring access to capital is offset by the shareholder’s desire to maximize returns on idle cash, so treasury must have a balanced view and invest proactively to protect capital and provide liquidity – all while trying to achieve competitive yields.

It’s a complex business, and it requires cutting-edge tools that provide integrated market discovery, trading, and reporting capabilities.

Trading portals for short-term investments offer treasury professionals these tools at no cost; however, choosing a portal provider requires significant due diligence.

Not all portals are created equal

Treasury teams need to be sure that the portal they select has the right funds to meet their requirements. But there are other considerations as well.

Here are six questions treasury organizations should ask to ensure a portal meets their needs.   

#1: Who owns the portal?

Some portals are owned by banks and are offered as an ancillary service to their cash management clients. Others are independently owned by companies that focus solely on supporting and developing the portal offering.

The ownership structure has significant implications for the type of products and quality of services a portal provides.  For instance, some bank portals favor their own proprietary products, while independent portals provide unbiased access to hundreds of investment vehicles.

Banks often see their portals as a secondary business, meant to strengthen ties with asset management clients. As a result, they may not devote significant resources to maintaining and upgrading the portal.

Independent portal providers are 100% focused on treasury services. They compete for business by offering up-to-date technology, cutting-edge functionality, and dedicated customer service.

#2: Is the portal future-proof?

Short-term investments technology is constantly evolving to handle new products, compliance requirements, and a dynamic global marketplace. It’s important to make sure a portal is not only relevant now, but that it also has the capacity to adapt to changing conditions in the future.

Treasury organizations should evaluate the resources a prospective portal provider has allocated to technology—including dedicated staff, customer service, and R&D budgets.

It’s smart to inquire about how potential providers have adapted to recent industry changes, such as money market reform, the global credit crisis, or the IRS’ new rules on simplified capital gains and loss reporting. Treasury professionals may also want to know about other new technologies in development, like automated trade settlement.

Ideally, a treasury portal should keep its clients a step ahead of a rapidly changing industry. That means, not only adapting technology to provide new and improved functionality, but also sharing insights into an evolving environment.

Ask for examples of any potential provider’s white papers and briefs. Find out if they’ve been recognized for innovation by treasury industry organizations, publications, or other third-party evaluators. Try to get a sense for how each provider shares information with clients; they may be your main source of insight for important changes that will affect the treasury function.

#3: How well does the portal company communicate and collaborate?

Treasury portal technology has to work seamlessly with treasury management software and processes. Onboarding new clients and managing the transition requires regular collaboration.

Good portal technology providers will work with their clients to solve their problems and, in the process, develop new functionalities that work for other clients, too. Ask providers if any of their platforms’ key features were developed based on client input.

Because collaboration is critical, communication matters, too. Treasury professionals may want to talk directly to high-level executives at the portal provider to get answers about configuring and optimizing the platform for their use.  Find out how easy it is to get in touch with the portal’s leadership team, including the chief technology officer.

#4: How does the portal make money?

Different portal providers have various revenue sources, which may have an effect on the breadth and quality of the services they offer.

Banks, for instance, may not expect to make much money from their portal — but make up for it by selling proprietary cash management products or other corporate banking offerings. Independent portals, on the other hand, generally earn a small percentage of the embedded management fees that fund companies charge the end-client.  Given the “intermediary” business model, and sole reliance on customers investing through their application, independent providers have to build their business on service and innovative technology.  In the end, it is their whole business, so they are more likely to be fully focused on it.

#5: How can I get the most out of my treasury technology?

The saying goes, use “the right tool for the right job,” which is true, but the right investment portal can actually amplify the impact of the other “tools” in the tech stack.  Since every treasury organization is unique, it is critical to work with a partner who has experience integrating with the broader market of treasury technology providers and knows how to maximize the workflow efficiency of the total solution set.

The following questions can help teams get a sense of what to expect:

  • Will the portal integrate seamlessly with existing treasury management systems, or will the treasury team have to adapt and retrofit their software?
  • Are there additional processes and tools that the treasury staff will need in order to use the portal, or can it work with existing applications?
  • Is reporting integrated into the platform, and can it incorporate off-portal investments?

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.

#6: How do clients feel about the portal?

Sales presentations and marketing materials can only reveal so much about a portal provider. Current and former clients offer the best insights into how portal technologies and services function in the real world.

Customer surveys and evaluations can provide critical information.  Statistics on client turnover can demonstrate how well —or how poorly — portals are meeting client needs. Teams can also speak directly to clients about their experiences. Especially helpful are clients that are similar in size or in the same industry.

Talk to your peers, it is a small treasury community and personal references should be weighted heavily and where there’s evidence of significant client losses, find out why customers left.

Find the right investment portal partner

The right portal can make a treasury department’s job easier, streamlining processes and identifying the best investment products that match an organization’s specific needs. But not all portals are alike.

Asking these six questions ahead of time will help treasury professionals find the best portal for their organization’s needs.