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.
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.