Liquidity in the wake of falling rates

Additionally, the banking tremors of 2023 highlighted the importance of diversification in cash investing. Suddenly, the opportunity cost of not reviewing cash investments became much greater.

All investors have a cash need, and we continue to see the importance of actively managing cash strategies. Money market funds (MMFs) invest in short-term, high-quality debt securities and offer investors a relatively stable, less volatile way to potentially earn a return on cash. 

The trends that have increased recent appetite for MMFs remain in all rate cycles: 

• Liquidity for same-day access versus term deposits;
• Diversification versus sole counterparty exposure;
• Operational ease; and
• Active duration management for optimising risk-adjusted returns that track interest rates

If central banks cut rates this year, will MMFs still be an attractive option?

Although rate cuts might lower the yields on new short-term investments, MMFs hold a mix of securities with varying maturities. Their ability to blend shorter and slightly longer-dated securities can help balance yield and risk, adapting to changes in the interest rate environment.

I have exposure to US Dollars, Sterling and/or Euros in my portfolio – how can I keep track of changing central bank policy?

Looking at forward pricing from central banks and the market assumption that rates are likely to stay higher for longer, if this is indeed the case, investors may benefit from these higher rates being passed through MMFs for years to come.

When rate cuts are priced in and there is an inverted yield curve, short duration investing may offer competitive risk adjusted returns, locking in short term yields.

Would I be better off locking into a fixed-term product now?

Investors should consider the different requirements of their cash balances, regardless of market cycle. We see a place for MMFs in operating and core cash positions to avoid low/no interest-bearing undiversified bank deposits. Portfolio managers should consider if their strategic cash allocations with a longer investment horizon might be able to take slightly more duration and credit risk than their short-term counterparts, offering the potential for return uplift. For investors, diversifying across different strategies and maturities will continue to be crucial in balancing the pursuit of competitive returns with maintaining security and liquidity.

Conclusion

We continue to see the importance of actively managing that strategy. MMFs invest in short-term, high-quality debt securities and offer investors a relatively stable, low-risk way to earn a return on their cash.