Liquidity in the wake of falling rates

The Bid 195. Falling For Cash

Episode Description:

As rates are going down, investors are reviewing their cash portfolios once again, considering how cash and cash equivalents typically react to monetary policy shifts and thinking about what to expect over the next 12 months. Beccy Milchem, global Head of Cash Distribution at BlackRock, will discuss the importance of actively managing cash regardless of the yield curve shape and shares her insights on the mantra of putting your cash to work and how this approach can benefit investors worldwide

Sources: US Department of Labor Statistics, October 2024, Global Money Market Fund Flows Update: 1H24, Fitch

Written disclosures in each podcast platform and each episode description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.comcorporate/compliance/bid-disclosures

TRANSCRIPT

<<THEME MUSIC>>

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. One year ago, we saw unprecedented flows into the money market fund space driven by uncertainty around central bank's interest rate policies. Fast forward to today and the short-term investment landscape has evolved significantly.

As rates are going down, investors are reviewing their cash portfolios once again, considering how cash and cash equivalents typically react to monetary policy shifts and thinking about what to expect over the next 12 months, I'm pleased to welcome back. Beccy Milchem, global Head of Cash Distribution at BlackRock.

Beccy will discuss the importance of actively, or better yet proactively managing cash regardless of the yield curve shape. And we'll share her insights on the mantra of putting your cash to work and how this approach can benefit investors worldwide.

Beccy, the Queen of cash, welcome back to The. Bid.

Beccy Milchem: Thank you for having me again, Oscar, and welcome back to London.

Oscar Pulido: It's good to be back. In fact, you and I spoke in May of 2023 and at the time, central banks were raising rates to curb inflation. we had regional banks in the US that were experiencing, quite a significant crisis. We had a debt ceiling, showdown in the US There was a lot going on and there was a lot of money pouring into the money market fund space. So, catch us up now. Where are we in terms of the investment landscape that you see that

Beccy Milchem: And that may seem a long time ago now. we've been very busy in that time and, yeah, money funds have continued being a really lucrative asset class, for clients, to hang out for their cash. So, Global Money Market Fund assets now sit over 10 trillion dollars. In 2023 we saw inflows in US and EMEA based money market funds of $1.4 trillion. And whilst that pace has slowed a little bit in 2024, we're still at over $600 billion inflows year to date this year as we look out at what is being priced by the three majors in the markets. So, we have, still a lot of uncertainty as to where markets will end up.

But if you look at the end of December 2025, the market is currently pricing for the Fed to end up just under 3.4%. Bank of England just up around 3.8% and ECB around about 2% or just under at the moment. But the fact of the matter is with interest rates are falling, interest rates are still interesting.

And so that is why you've still got clients looking at making sure they are, in the right place for their cash. if we look back over historic markets, when interest rates are above one point a half percent money, market funds typically see inflows. You could say that whilst interest rates are still falling, investors are still falling for cash.

Oscar Pulido: Interest rates are still interesting. So, you've pointed out that now central banks are starting to cut rates and there's forecast that they will continue to fall through the end of, next year. But how does, the front end of the yield curve when the central banks are cutting rates, that's what they're impacting, how does, what does that mean for the cash and cash equivalent market? those investments that tend to mature in less than a year? What's the practical impact of that space?

Beccy Milchem: For investors like you and I think the main instruments that you'll use are either a bank deposit or a money market fund to invest your daily liquidity or cash, and the market will react quickly. So, when interest rates get cut by a central bank, deposits typically, pass those rate cuts through very quickly. What we've seen actually through, for both the time when money market rates were going up, central banks were raising rates, and now when they're coming down, banks have been very keen to maintain their net interest margins.

So that means that as soon as the central bank cuts, they're going to cut their deposit rates for clients on their cash. what money market funds typically do is extend duration ahead of any anticipated market movement. So, they effectively have a bit of a lag effect in terms of the. Interest coming down, the yield coming down on the money market fund product in an interest rate falling environment.

Again, if you look back historically, that has typically been somewhere between sort of 15, 30 days that they will outperform other available options, for daily liquidity.

Oscar Pulido: So just the way in which they're managed means they can perhaps keep the interest rate more interesting, to use your phrase, a little bit longer than some of the alternatives that are out there. And you've talked about, actively managing your cash or perhaps proactively managing your cash investments? Is that the case? Regardless of what the interest rate environment looks like? So, the yield curve can take on many different shapes - it can be flat, it can be inverted, it can be steep. Does it depend on what the yield curve looks like as to how actively you should manage your cash? Or is it in all of those periods?

Beccy Milchem: I think it's all of those periods. I don't think many people actually think about cash as being an actively managed strategy, but it absolutely is. And one of the reasons we have dedicated teams of people looking at this space.

When we first had negative rates in Europe, and obviously they've been in place in other parts of the world as well. we had a lot of investors talking about safety deposit boxes as the best strategy for putting their cash away. But I have I maintained that I don't think sticking a cash under the mattress is the best strategy.

Last time we met, I talked about the kind of the three pillars. That we will typically manage cash by, in which most of our clients will think about as well. So that is the first pillar being, safety or capital preservation. The second being liquidity, like having access to your cash when you need it, and the third pillar being yield.

And, at the moment, the situation we've got is that there are still so many uncertainties out there in the world. So, we've got some of the data points that central banks will look at in terms of inflation and unemployment in impacting, how they're thinking about, interest rate environment. But we've also got geopolitics. We've got tensions in the Middle East. We have upcoming US elections. A lot of these things are playing into what markets are thinking about where central banks will move, whilst investors are very focused on making sure their cash is safe and making sure they've got access to it when they need it, the yields can still move really quickly. And why we think about managing the cash so actively.

So, one example to bring this to life is the market reaction we saw around the October unemployment data in the U.S. which surprised markets. So, we were expecting the unemployment to come in around 4.2%. It's around about 4.1%. and what we saw after that was a repricing of expectations around what the Fed might do, particularly in the six-to-12-month part of the curve.

And market pricing of where the Fed will be at the end of 2025, moved by nearly 40 basis points. Now, that's quite a lot in the few days following that print of non-farm payrolls. So, what our portfolio managers will do typically is that they are assessing the markets on a daily basis. They're looking at it throughout the day, and when they see some of this repricing, they will take the opportunity to potentially lock in some of those are higher yields. they'll do that within a risk-controlled framework, thinking about all of the other market uncertainties that we've also talked about, but seeking some opportunity within the space of a money market fund regulations to add a little bit of duration where we see that benefit of yield pickup.

Oscar Pulido: And just going back to something you said earlier - I think you're right, people don't tend to think of the cash portion of their portfolio as where there's active management going on. You mentioned employment data, you mentioned central banks. We often talk about those things and then discuss what does that mean for the stock market or what does that mean for the bond market. But you've made the point that then there's also nuance that can take place in the cash market that one can take advantage of. There's a phrase that I feel like I often hear and maybe people hear, and that phrase is putting your cash back to work. And sometimes that's after a market correction, or sometimes that's after some period of instability has gone away. And when you hear that phrase, what does that mean to you?

Beccy Milchem: There's a common mantra at the moment that there's a lot of cash on the sidelines in market and that in the market, and that cash needs to be put to work. I can't argue there's a lot of investment opportunities out there, particularly you’ll hear market commentators talk about opportunities about locking in, from a fixed income perspective and investors should absolutely look at those opportunities and when the time is right for them to take risks, deploy that in a portfolio.

But I come back to the fact that cash, I think, is the only asset class out there that is relevant to every single investor in this world. Everyone has a little bit of cash in their portfolio. You and I will pay for things on a daily basis. We have to keep something readily available for that morning coffee.

So, what is important to do is just make sure that element that you are holding in your portfolio, for cash, is working as hard as it can for you. It's still not uncommon for us to find investors that are getting zero on their cash and I think all of us will agree, and you and I will probably agree this too, that where investors are focused in their portfolios is typically on the risks they're taking in their portfolios, and that's where their attention tends to be on from a portfolio perspective.

So, I just want to remind everyone to make sure that they are ensuring that their cash portion is working for them. In Europe in particular, we've seen more end investors using money market funds in the last 18 months since we last spoke. And some of that is because the benefits are being brought to them through new platforms that are making them more readily accessible.

But as someone who's spent the vast majority of their career working in cash. I'm just delighted that my friends and family knowing what it is I do these days and are actually talking to me about the asset class that I work in.

Oscar Pulido: And that's fascinating and a bit shocking. You said people are still earning 0% in cash now. That was perhaps understandable a few years ago before Central Banks started to raise interest rates, but these days, it seems shocking that could still occur. But again, I suppose then spotlights, the fact that there's a lot going on in this space that maybe people aren't aware of and maybe they're not aware of some of the innovation that might be occurring in this space.

We talk a lot about innovation on The Bid, whether it's cryptocurrency, whether it's, artificial intelligence. What's some of the innovation that you see in the cash market?

Beccy Milchem: Yeah. And I come back to that the point I just said around how you and I would use cash on a daily basis.

A lot of importance around cash investing comes down to the operational considerations, how easy it is to make that cash investment. and the fact that most of us get our salaries paid into a bank account. And then what do you do from it from there? The advancement in technology, I think is helping make cash investing easier for clients.

It's easier for them to assess the market. there are more providers out there bringing some of these solutions, including money market funds to their platforms to help investors with their cash. I think another couple of important considerations around innovation in our space.

One is I think the ecosystem that you operate in is key. And so again that technology that's able to help bring solutions to, clients, but also, I think considerations around the kind of the wrapper that the product sits in. And we are looking at innovating in this space and more to come on that.

The other it is more from a technology perspective and a blockchain perspective. So, we are looking at ways around how distributed ledger technology can help remove some of the frictions being of money market funds being used as a transferable security.

We are looking at a little bit more in the institutional client space, but in a world where high quality securities are really sought after for collateral purposes, we see government style money market funds, i.e. money market funds that invest in the same kind of high quality, securities being able to be used for initial and variation margin for collateral purposes. and clients will typically have these exposures if they are involved in derivatives trading.

Now, one of the things that distributed ledger technology should be able to do is move the unit of a money market fund much more quickly. And in times of market volatility and disruption, what we typically see is that collateral requirements tend to increase for those clients because margins move wider, by levering technology to move a money market as a security and post equivalent securities. We think that massively helps from efficiencies perspectives, but also arguably benefits to financial stability. So, you don't get as much movement and flux around people needing to access cash and move it around a system they can use the existing thing they're in today and put it somewhere else.

Oscar Pulido: So, we've talked about, evolutions in technology that you're seeing in the space. We've talked about evolution in interest rates and what that means in terms of the investment opportunity set and the need to proactively manage. Your assets, in this, kind of space of your portfolio. What are some of the other considerations that you'd want to leave investors with as we go into 2025?

Beccy Milchem: So, I think the last time we met, we talked a lot about making sure that you don't need cash on the table. And don't forget the cash element in your portfolio. Think about the benefits of outsourcing this. We have busy lives, all of us have busy lives. One of the benefits of technology is that it's helping us to make our lives slightly more efficient, or at least that's what I'm hoping. but in the same way, think about outsourcing, some of the things that.

You don't have time to do to the people that really do have time to do it. So, as I've said, interest rates are still interesting at the moment, but rest assured whether they're falling or they're lower, we've got experts who are always going to find them interesting. And I promise you that these experts aren't dull - they are still interesting round a dinner table. But think about the benefits of just outsourcing that to someone that's job. It is to look at the cash markets on a daily basis.

Oscar Pulido: And the last time we spoke, I think I used the phrase that cash is king. I think we were referring to an environment where people were flocking to money market funds, and you, corrected me and said, Cash is Queen. And I think you've earned a little bit of that nickname here in the halls of BlackRock as the queen of cash. So, thank you for sharing, these great insights on the cash market, Beccy, and thank you for doing it here on the. Bid.

Beccy Milchem: Thank you So much, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. On next week's episode, we'll be hearing from three investors about how the public markets are increasingly offering opportunities to invest in the transition to a low carbon economy.

<<SPOKEN DISCLOSURES>>

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures