A recent publication from Fidelity Institutional Asset Management, while looking at the money markets in the US, emphasizes that investors are looking for liquidity.
The report, written by Kerry Pope and Chris Lewis, each an institutional portfolio manager with FIAM, begins with a discussion of the Federal Reserve’s September rate cut and its intervention in the repo markets. This is familiar territory.
A Thirst for Liquidity
More intriguingly, Pope and Lewis also discuss strong flows into money market funds and other very liquid investments, across both government and bond funds. By the end of the third quarter of this year, total taxable money funds had close to $3.3 trillion in assets under management. In December of last year that number had been just a little above $2.8 trillion. This includes both retail and institutional investors.
Looking at the prime subsector: at the end of the third quarter prime funds had grown by $157 billion year to date. Further, the net yield spread between prime funds on the one hand and government and agency money markets on the other had gone to 16 basis points.
Other data pertinent to the great thirst for liquidity in today’s markets: ultra-short funds, which are those with duration of between half a year and 1.5 years, and short-term funds, which are those with a duration of between 1.5 and 3.5 years have both seen their balances rise. In the last four months, the rise $14 billion for the ultra-short-term and $18 billion for the short-term funds.
Despite the fact that for most of 2018 the short-term funds were flat, Pope and Lewis describe 2019 as a time of “revitalization” for them. Through 2018, ultra-short funds were growing at the expense of the short funds. This year, both are growing, bringing in money from other sources.
All of this is pertinent to the alternative investment universe in that it suggests a great and increasing demand for liquidity in the investment world. This might make life more difficult for those alternatives on the illiquid side of the investment spectrum, especially private equity funds and some of the traditional hedge funds. However, it may be encouraging news to some of the newer alternative investments that are designed to provide liquidity.
What About That Rate Cut?
Let us return, though, to FIAM’s observations about where the Federal Reserve stands.
The Fed lowered interest rates in July and again in both September and October. Upon announcing the third cut Oct. 30, Chairman Jerome Powell said that he thinks the current level is “likely to remain appropriate” through the remainder of the year.
Pope and Lewis were writing before the third of those cuts, although their report for FIAM did indicate that the market expected a third cut. They also pointed out the division in the Fed. Their report notes that there exists a spectrum of opinion between inflation hawks (who might be inclined to increase rates to protect savers) on the one hand and doves (who may be willing to go further in the direction of low or even negative rates) on the other. Powell represents the middle of that spectrum, and he has faced dissents on either end of it.
The President of the Boston Fed, Eric Rosengren, is more hawkish than Powell. Rosengren has described recent rate cuts as, at best, unnecessary.
The President of the St Louis Fed, James Bullard, is more dovish, calling for more aggressive cuts.
Stall-out and Downturn Coming?
It is not obvious that the recent cuts will stimulate continued growth. Part of the reason for worry about a stall-out and downturn is the continued tensions over world trade, especially between China and the US. Trade tensions “are creating uncertainty about global value chains and having a dampening influence on U.S. investment and imports.”
There are at present “mixed signals” in terms of both corporate and consumer confidence in the economy, which is worrisome because consumer confidence in particular “has been the powerhouse” of the growth of recent years. The uncertainty of the present situation helps account for the growing thirst for liquidity described above.