Sponsored article: Robert Evans looks at dealing with Covid-19 and its impact on a money market fund
The first three months of 2020 have been far removed from anything we have experienced in the sterling money markets since the financial crisis of 2008. The events over the past few weeks have been very much focused on “the real economy”, unlike 2008 which was primarily caused by a breakdown in confidence within financial markets. In both cases, however, those ultimately impacted are the people in our communities.
In these challenging times CCLA is very conscious that our council clients are thinking about increased liquidity to protect services, and we need to focus on keeping a secure, high quality fund that can be accessed daily, and still provides a competitive rate of return. Council budgets are under enormous pressure to deal with the operational impact of Covid-19, we want to help minimise any pressure on treasury budgets.
We started to see signs of a “liquidity crunch” occurring. This was a consequence of corporate institutions drawing down their bank credit facilities to replace income streams that had all but dried up
Robert Evans
Early in the quarter, sterling money market rates drifted lower, a consequence of various comments made by members of the Bank of England’s Monetary Policy Committee (MPC), but Covid-19 really began to impact in the last few days of February. Initially, we saw a significant reduction in yields as banks rightly assumed the virus would result in a marked slowdown in global economic growth.
However, in late March the ramifications of a near total economic shutdown were becoming increasingly stark. We began to see signs of a “liquidity crunch” occurring. This was a consequence of corporate institutions drawing down their bank credit facilities to replace income streams that had all but dried up—the classic treasury response in a crisis. This increased demand for short-term cash led to an upward swing in the yield banks were willing to pay for deposits.
Simultaneously, corporates recalled vast cash deposits held in large institutional money market funds, which ordinarily would be providing banks with short term cash. According to JPMorgan, these money market funds experienced redemptions in the last month of $102 billion, 31% of their assets*. As a result, the money market funds which have large corporate clients needed to raise liquidity by selling their assets in the secondary market, and this too fuelled a further increase in money market yields.
The CCLA Public Sector Deposit Fund is relatively well placed because our public sector client base has not experienced the huge outflows seen in other funds. Also, being particularly mindful of the increased volatility in local authority cash flows in the final weeks of the financial year, we had already increased our weekly liquidity position during the second half of March. This has helped cushion us from what was going on more widely in the market.
Where we have confidence in the credit quality of investments, the liquidity and duration, we have and are able to take significant opportunities in this market to make good returns.
Robert Evans
Ensuring appropriate levels of liquidity is critical, especially in times like these. However, we must also be especially confident in the credit quality of the Public Sector Deposit Fund and therefore the security of the fund. While credit concerns about banks may emerge later during this crisis, it is not yet something that has arisen. Even so, we have reduced the fund’s term exposure to less well rated European and Japanese banks and continued our policy of having no exposure to corporate issued commercial paper, or to Chinese and Middle Eastern banks.
Where we have confidence in the credit quality of investments—the liquidity and duration—we have, and are able to take, significant opportunities in this market to make good returns. As the fund has not seen the level of outflows experienced by others, we have already been able to make advantageous investments with several well rated counterparties at yields even higher than before the Bank of England’s emergency rate cuts.
CCLA has been managing cash funds for over 60 years and our experience through previous crises have held us in good stead. It is too early to say if the market volatility in this crisis is over, but we do expect the exceptional opportunities we have witnessed to diminish as central banks continue to inject even more support into the market, and interest rates fall. This makes it more important than ever that CCLA continues to manage the fund professionally. We are always conscious that our clients are at the forefront of fighting Covid-19 in communities—our job is to protect and grow cash deposits to help in that fight.
*‘Corporate cash crunch makes bank funding metric look jittery’, David Henry, (March 2020), Reuters News
Robert Evans is a cash fund manager at CCLA.
