ACCESS A BROADER MARKET PERSPECTIVE

WHERE THE SMART MONEY IS FINDING SAFETY BY KATY BURNE BY THE NUMBERS

JANUARY APRIL 3.3% -3% Projected rise in global economic growth in 2020, as Projection of global economic contraction in 2020 of Jan. 9 1 because of COVID-19, as of April 6 1 $3.926 TRILLION $5 TRILLION Size of US money market fund assets, as of Jan. 31 2 Size of US money market fund assets, as of April 27 2 $4.1 TRILLION $6.6 TRILLION Size of Federal Reserve balance sheet, as of Jan. 22 3 Size of Federal Reserve balance sheet, as of April 22 3 2% 11% Increase in deposits at BNY Mellon from third quarter Increase in deposits at BNY Mellon from fourth 2019 to fourth quarter 2019 4 quarter 2019 to first quarter 20204 5.1% 42.5% Annualized growth rate in bank deposits, as of Jan. 5 Annualized growth rate in bank deposits, as of Mar. 5 $6.49 BILLION $980 BILLION Inflows into US government money market funds in Inflows into US government money market funds the seven weeks ended Jan. 29, 2020 6 in the seven weeks ended April 22 6

SOURCES: 1. International Monetary Fund 2. Crane Data 3. Federal Reserve Bank of St Louis 4. BNY Mellon 5. Federal Reserve 6. Investment Company Institute

COVER: ADAM MAIDA WITH INVESTORS FACING CONTINUED UNCERTAINTY FROM THE PANDEMIC, MANY ARE BUILDING LARGER-THAN-NORMAL CASH POSITIONS, WITH GOVERNMENT MONEY MARKET FUNDS AND BANK BALANCE SHEETS A PREFERRED DESTINATION. THE INTENSITY OF THAT DASH FOR CASH HAS SURPASSED EVEN 2008 LEVELS.

BY KATY BURNE

he least glamorous invest- “Historically, trust banks see the on their bank liquidity lines and were ments on Wall Street biggest deposit increases in times of limited to issuing commercial paper in have become some of stress,” said Brian Foran, analyst at maturities of one week or less because T the hottest places to be Autonomous Research. He put most the volatile market conditions pre- as investors worry about the unpre- of the increase in deposits down to a vented them from issuing debt longer dictable duration of the COVID-19 “huge flight-to-safety” and “cash-is-king than seven days. crisis and the risk that recent rallies in mentality” among asset managers, as Activity in most markets has stabi- stocks and other risky assets may be well as corporations drawing cash on lized since central banks announced overdone. revolving credit lines in an uncertain a series of emergency actions in That buildup of cash has benefitted environment. March. The Fed has facilities not just money market funds, bank deposits US Treasuries still appear to be some for Treasuries but for everything from and gold, among other areas. Investors of the most sought-after securities. A highly rated corporate debt and have turned to government money stampede for Treasury bills in March fixed-income exchange-traded funds market funds faster than they did in the briefly sent their yields into negative to mortgage bonds, municipal bonds, 2008 collapse, with some funds even territory for the first time in four years. commercial paper and bank certificates closing their doors to new investments. Those yields are still anchored near of deposit. Financial and non-financial institu- some of their lowest points of the year, Those programs are driving rates tions alike have deposited cash on bank even with the government borrowing to lower but have also increased the balance sheets at a rapid clip. Much of fund more than $2 trillion in economic Federal Reserve's balance sheet to the money is coming from government stimulus packages. more than $6 trillion from $4 trillion money market funds, whose managers Companies have also paid more as recently as December. Some people have cash rushing in and sometimes than normal to borrow in the commer- expect it to grow to as much as $10 tril- nowhere else to put it that is generating cial paper market. Many non-financial lion, an unprecedented level. any yield. corporates rated A-2/P-2 drew down Nevertheless, even as bargain BILLIONDOLLAR MATTRESS BNY Mellon Asset Servicing has seen above-average custody deposits as clients seek safety

200

March 13: Commercial paper market freezes; OPEC 150 talks break down

100

March 26:

index, Jan 1, 2020 = 100 Dow climbs out of 50 bear market; Senate approves federal stimulus

0

Jan - 2020 Feb - 2020 Mar - 2020

SOURCE: BNY MELLON ASSET SERVICING

hunters tiptoe back into stocks and stability, but also because we have a keeping powder dry in anticipation of investment-grade companies sell strong balance sheet and are prepared needing to raise cash for margin calls. record amounts of new bonds, the to help with their cash and liquidity Access to liquidity is a big selling point majority of investors are still displaying needs even in difficult times,” said when financial markets are not func- above-average levels of caution. Emily Portney, global head of client tioning smoothly, because incoming They have good reason: approxi- coverage in asset servicing for BNY cash from collateral calls on winning mately 25 million were unemployed in Mellon. trades often arrives after other coun- the US as of the end of April, roughly Similarly, State Street saw average terparties start demanding cash on 18% of the workforce, but that could deposits in the first quarter of $180 losing trades. rise to as much as 25% by the middle billion, up 16% year-over-year. J.P. Liquidity is not the only motivating of May, according to BNY Mellon strat- Morgan’s corporate and investing factor. Some hedge funds have been egist John Velis. The International banking unit saw deposits average $562 putting money onto bank balance Monetary Fund is projecting the global billion, up 14% year-over-year. sheets to sidestep potential counter- economy will contract by 3% this year, BlackRock's cash-management busi- party risk from their prime brokers, worse than during the 2008–2009 ness saw $50 billion in net inflows in although this is less of a concern than meltdown. the first quarter as clients de-risked it was in 2008. “There’s no question rapidly, the company said. that you rely on your third parties far WALL OF CASH In many cases, money market funds more in moments like this than you Banks with custody and transac- were stashing cash at banks to avoid do when times are good,” noted Tom tion-banking operations in particular buying negative-yielding securities. Staudt, chief operating officer at Ark have seen a surge in cash from clients. “Some funds may be able to tempo- Investment Management, an issuer of At BNY Mellon, deposits in the first rarily park cash at their custodian at actively managed ETFs. quarter averaged $258 billion, up 20% some neutral rate, which is a way of While Ark did not need to park cash from year-ago levels, rising to $337 bil- staving off negative yield,” said Alastair with banks, Staudt said counterparty lion on the last day of March. Sewell, senior director in fund and risk is a key consideration when picking “Our clients depend on us not only asset management at Fitch Ratings. partners. “For us, BNY Mellon makes for our operational expertise and Elsewhere, asset managers were that list since we are confident they are MARCH MADNESS Inows into government money market funds exploded, as prime funds saw outows

350,000 Government money market funds 300,000 Prime money market funds 250,000

200,000

150,000

100,000

50,000 Millions of US dollars

0

(50,000)

(100,000)

12/11/201912/18/201912/24/201912/31/201901/08/202001/15/202001/22/202001/29/202002/05/202002/12/202002/19/202002/26/202003/04/202003/11/202003/18/202003/25/202004/01/202004/08/202004/15/2020

SOURCE: INVESTMENT COMPANY INSTITUTE

a healthy organization in good financial expanded that change to a wider pool debt carrying little to no yield, or even condition, not a niche broker that we of banks in March, but the changes may the risk of a negative yield. have to worry about going under,” he not provide much balance-sheet relief It took just seven weeks for US gov- added. because they are only temporary. ernment money funds to grow by $980 Commercial banks overall have seen Another issue is that the margin billion as of the week ending April 22, clients adding cash to their accounts. banks make on extending their balance according to the Investment Company The annualized growth rate in bank sheet is narrowing. When the Fed low- Institute. In comparable times of rapid deposits for March was 42.5%, Fed ered benchmark interest rates by 150 change, it took far longer: 32 months data show, compared to an average basis points in March, it lowered the around the time of the regulatory of 6% in the previous 12 months, and rates banks can earn on cash they park shakeup of money market funds in weekly data through April 15 show the at the Fed to just 0.1%. 2016 and 16 months in the 2008 global growth may be faster still. The cash J.P. Morgan Chase told hedge financial crisis. deposits, or “reserves,” that banks park funds in early April it would need The week ended March 25 was the at the Fed grew to $346.9 billion in the to start charging them as of April fourth-largest weekly inflow ever, at week ended April 1, the most since 17 for US dollar prime brokerage $344 billion, ICI said, and the speed 2014, but as of April 22 they stood at deposits, because of the lower rates. A of that influx — coupled with the Fed’s $184.5 billion. spokesman for the bank declined to say rate cuts — “surprised a lot of people,” The problem is that inflows are if the charges were ever implemented. said Laurie Brignac, head of global coming to banks at a challenging time. Such charges are rare, but Sewell says, liquidity at Invesco. Some bank balance sheets are already “We find the custodians are only willing Vanguard, a $5.3 trillion asset man- tight due to post-crisis leverage rules, to offer zero rates for a short period of ager, on April 16 said would shut its though most are still open to helping time, and after that they would charge.” $39.5 billion Treasury money market clients manage their cash. Congress fund to new shareholders accounts, anticipated this imbalance and adjusted SHELTER IN PLACE citing a desire to protect existing the supplementary leverage ratio to Perhaps the most dramatic evidence investors from the downward pres- exempt custody bank deposits at cen- for the flight to safety has been the sure on yields. On March 31, Fidelity tral banks in 2018. The Fed then further torrent of money chasing government also said it would “soft” close certain “Our clients depend on us not only for our operational expertise and stability, but also because we have a strong balance sheet and are prepared to help with their cash and liquidity needs even in difficult times.”

—EMILY PORTNEY, BNY MELLON

government-only funds, according to and certificates of deposit. In March, over the virus persists. The liquidity Crane Data. investor desire for liquidity led to facility held $48.8 billion in assets as of The rush into government funds nearly $150 billion in outflows, more the week ended April 22, down from a accelerated when they were paying a than double what came out in 2008. peak of $53.2 billion on April 8 after the higher yield than Treasury bills them- Banks have offered to buy securities market's initial struggles. selves. In late March, the majority of from prime funds if they get squeezed the bills market experienced negative by redemptions. BNY Mellon pur­chased BIZARRE BEHAVIOR yields, including for debt as far out as $3 billion in securities from both its own Some of the keenest signs that tradi- December. The last time that happened affiliates and third-party money market tional havens were not behaving nor- was 2015. funds in the first quarter, and continued mally were in what are supposed to Yields on one-, three- and six-month buying more in early April. be the safest investments. In March, bills briefly started rising again in early US money market fund assets traders said several banks were not April as the federal government issued exceeded $5 trillion for the first time as quoting prices for Treasuries and there more debt to help pay for its eco- of April 27, up about $1 trillion year-to- were reports of a shortage of physical nomic stimulus and the delay in fed- date, with monthly inflows to that point gold bars. eral tax collections. “We were able to into prime funds now positive again at Rates on commercial paper maturing get on the phone with the US Treasury $75 billion and government funds up in three months and longer briefly rose to reinforce the need for a lot more $350 billion, according to Crane Data. back to levels last seen in 2008, despite cash-management bills,” said Brignac But some government funds with the Fed backstop. In the week ended at Invesco. But yields fell again in mid- high expenses are already waiving man- April 16, tier-II issuers only sold a daily April and remained at depressed levels agement fees to prevent their yields average of $1.5 billion in commercial through the second half of the month going negative. paper maturing in 10 days or longer, despite robust issuance, indicating safe Moody's Investors Service said in an compared to $2.4 billion in the week assets were still in high demand. April 16 note that it expects assets in the ended March 6 and $868 million in the As money flooded into govern- Fed’s new money market fund backstop week ended March 27. ment funds, it flowed out of "prime" to increase if short-term money market “Although as a Tier II, you are a fairly funds, which buy commercial paper liquidity remains tight and uncertainty strong investment-grade company, you HELD IN RESERVE Bank deposits called “reserves” in Federal Reserve accounts have risen to levels last seen in 2014

400,000

300,000

200,000

100,000

0 Millions of US dollars -100,000

-200.000

-300,000

13

Apr - 2017 Apr - 2012 Apr - 20 Apr - 2014 Apr - 2015 Apr - 2016 Apr - 2018 Apr - 2019 Apr - 2020

SOURCE: FEDERAL RESERVE

were having to play a high wire act” by managing director at the Promontory the 10% required by regulators, but now borrowing over just a couple of days network. has 38% in overnight cash. at a time, said Tom Deas, chairman of Even repo markets — long a port in With traders at counterparties also the National Association of Corporate the storm for investors wanting to gen- working from home, “It has made Treasurers. erate a return via short-term US dollar accessing trading teams and liquidity Meanwhile, insured cash sweep loans collateralized by Treasuries more challenging,” said Andy Burgess, products have grown by their largest and other securities — have not been a fixed-income investment specialist at monthly dollar amount in the pro- able to absorb all the available cash, Insight. Markets are far from out of the gram’s history, which dates back to partly because mass de-leveraging has woods, and memories from the March 2011. Balances in April were 35% higher reduced the demand to borrow. pullback are all too fresh. than they were at the start of the year, As a result, rates on repos have lately “Some counterparties simply didn’t according to Promontory Interfinancial been comparatively low and even occa- want to trade,” he added. “We do not Network, a US network of about 3,000 sionally negative, which is extremely rely on market liquidity to try and EMBARGOED banks that hold $375 billion in US rare in the US. The Fed has an over- meet client liquidity needs, which left deposits. night repo facility, which is useful for us relatively well positioned when it An insured cash sweep is a product sucking up excess cash from money dried up.” that allows investors to federally markets, but it pays 0% interest, has a insure large dollar deposits by placing 1:15 p.m. cutoff, and a $30 billion cap blocks of cash with multiple banks per fund. Nevertheless, repo remains through one intermediary — BNY central to many institutions’ short-term Mellon included — at one interest rate. cash investment strategies. Operationally, the client funds stay on Many funds have been insulating their Katy Burne is editor-in-chief of Aerial View deposit until the client places a with- portfolios by carrying higher volumes Magazine in New York. drawal and the money is put back in of cash, especially as sharp moves con- Questions or comments? Write their operating account. “With every- tinue. Insight Investment's UK Liquidity [email protected] thing happening in the world, safety Fund, for instance, typically runs 30% of in BNY Mellon Markets or reach out to matters,” said Joseph Hooker, senior its portfolio in overnight cash instead of your usual relationship manager. BNYMELLON.COM

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