There has been no sudden influx of assets into money market funds as a result of the terrorist attack on New York in September, according to a spokesperson for Investec Guinness Flight (IGF) in London, who claims that there is just as much uncertainty in the cash markets as elsewhere.
“We haven’t seen a doubling in size in cash funds, though money is moving in and out as usual. There is a belief that inward flows increase in times of uncertainty but there’s little evidence of that happening,” he says.
Jonathan Curry, a strategist at Barclays Global Investors in London, says that while the cash markets come into their own during times of crisis there are clear short and medium-term trends that can be identified since the tragic events unfolded.
“There’s no sense of panic. Not only did the vast majority of money market funds remain open from the onset of the crisis, but at least 85% of regular euro commercial paper (ECP) issuers returned to the markets within days of the tragedy,” he comments.
One of the main trends that Curry identifies is that issuers who normally look to the domestic dollar market for their funding are turning to the euro dollar and ECP markets instead, with spreads widening in money market assets.
Going forward, Curry believes that central banks will continue to inject liquidity into the markets, since they are comfortable with overnight euro and dollar rates being way beneath their usual target, that the markets expect further interest rate cuts and that volatility will remain at least until the scale and nature of American military action becomes clear.
IGF’s spokesperson suggests that it isn’t that easy to judge how the cash markets are performing at the moment, since many investors’ assets are tied up, and that there will be a delay in decisions being taken about investment strategies as both institutions and their clients hold out, either on compassionate grounds or simply to wait to see the mood of the markets once they begin to settle down. “A lot of affected players may be unsure what to do with their liquidity, and may well want to put it somewhere safe before deciding on longer-term investments.”
Curry points out there has been a swing to quality and sovereign debt, such as well-rated banks and corporates and that this is likely to continue for the medium-term future. “We expect to see a continued flight to quality and funds with reviewed risk aversion strategies. But this may not be long term as the markets tend to stabilise fairly quickly.”
Paradoxically, according to IGF’s spokesperson, despite the uncertainty and the fact that industry players are going to rethink their investment strategies in the coming months, there is a certain calm in the money markets. “We haven’t seen any rash decisions concerning portfolio changes and turnover in the cash markets is not overly heavy,” he claims.
Furthermore, he suggests that money markets do not benefit from a climate of low interest rates, since these affect returns. “Although cash is likely to be an asset class that will get some attention in coming weeks, lower interest rates don’t help. And the industry consensus is that there will be further cuts.”