When investors become skittish about turbulent markets, a “flight to quality” environment often ensues and, that translates into an increased flow of assets into money market funds. The current situation with the COVID-19 virus is no different. According to Crane data, US money market funds had $70 billion of net inflows in the first week of March, a majority of which found its way into government money market funds. This trend could continue in the near term as investors respond to the markets’ volatility, and it probably will not stop until the concerns about the COVID-19 contagion subside. Invesco believes the US money market fund industry, and Invesco’s money market funds, are well equipped to respond to changing market dynamics. Here are three key reasons why:
1. The US Federal Reserve will likely do what is needed
Given this historic move in markets, the Fed has already demonstrated it is willing is to do what is needed to support the markets, as evidenced by its recent 50-basis point, inter-meeting rate cut. It was the first rate reduction of that scale since 2008. On Monday, March 9, the Fed also increased the amount of liquidity offered in the market by increasing its daily overnight repo operation (agreements whereby the Fed purchases Treasury, agency debt, or agency mortgage-backed securities from a primary dealer counterparty). The Fed increased the maximum for this daily repo operation to $150 billion, up from $100 billion, and market participants took advantage of the higher ceiling by utilizing $112 billion, a lower amount than what the Fed made available to the market. The Fed has also increased the maximum for its two-week term repo operations, which are offered on Tuesdays and Thursdays, to $45 billion from $20 billion. Markets expect another interest rate cut following the Federal Open Market Committee’s (FOMC) March 17-18 meeting, if not before.
2. Reform strengthened US money funds
Following the US money market fund reforms of 2010 and 2016, the Securities and Exchange Commission strengthened money market fund liquidity requirements by implementing new minimum daily and weekly liquidity thresholds. Invesco’s liquidity is well within these requirements. (Note: Before the reforms of 2010, there were no requirements for money market funds to meet any specific levels of liquidity buffers to meet investors’ redemption requests.)
3. US banks meet higher standards
Invesco’s Global Liquidity Credit Team believes that US banks, specifically those on our approved list, remain healthy with high levels of liquidity and capital. Following the global financial crisis of 2008-2009, regulators required large banks to maintain higher liquidity levels, increased capital requirements and subjected them to annual stress tests for scenarios just like the one we are facing today.
All that being said, we also acknowledge that investors look to money market funds to deliver income, and in the current environment, yields are definitely lower. Still the primary benefits that money market funds seek to deliver — principal stability and liquidity – remain intact. An adaptive Fed and a highly regulated market support these objectives. We believe Invesco’s money market funds are well positioned in this environment to meet their key goals of delivering stability and liquidity to investors.
The entire Invesco Global Liquidity Credit Team contributed to this article.
Safe-haven assets do not reflect risk-free investments.
The opinions referenced above are those of the author as of March 9, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.