The vast majority of corporate treasurers are maintaining their cash positions at existing levels amid the market turmoil and volatility that has recently caused yields to whipsaw. Many corporates increased their allocation to cash when interest rates moved off zero and have maintained these positions ever since.
Alongside the compelling yield from higher interest rates, the shelter MMFs offer from the current market volatility in equity and longer-term bond investments is also leaving corporate strategies unchanged, explains Federated Hermes’ Deborah Cunningham who oversees the asset manager’s US$630bn liquidity product offerings across dollars, sterling and euros serving the institutional and corporate treasury market.
MMFs as well as other types of liquidity products ensure investors get their money back at par plus a little bit more and they also offer the ability to access instant liquidity, she continues.
“The tariff-related market upheaval of recent weeks highlights the necessity for treasurers to consider carefully an allocation to money market funds as part of their cash management strategy. With same day liquidity, these products provide treasurers with the ability to access and deploy their cash during periods of considerable market volatility. If treasurers suddenly face a need they didn’t realise as part of cash flow analysis, they can place a redemption order and get the money back.”
The few treasurers that are seeking to adjust their allocation to cash are typically planning for acquisitions or large payments ahead. Another area where some treasurers are making modest moves is around lengthening the duration of their cash investments out of MMF to pick up a little extra yield, she adds.
Most of Federated Hermes MMFs are AAA-rated and shaped around risk mitigation, diversification and credit standards. MMFs can’t invest longer than 60 days from a weighted-average maturity basis or over 13-months on an individual security basis.
Cunningham observes enduring demand for MMFs from corporate treasurers seeking the same day settlement benefits and market return MMFs offer relative to other short-term, liquid products. MMFs offer an attractive premium for corporate treasurers over bank deposits; investors may buy repo, or direct commercial paper, but these products don’t ensure the level of diversification that comes with buying 100 different issuers in a MMF product, she says.
“There are lots of advantages to being in managed products in MMFs as long as the curve gives you some positive slope.”
Tokenisation and the future of MMFs
Federated Hermes is exploring innovation around digitising and distributing funds via blockchain which will gradually become a more substantial part of the asset manager’s offering. Cunningham is particularly excited about the ability of blockchain to reach new users and reflects on how trends around tokenisation of the sector promises faster settlements, lower costs, and broader access. The technology will increasingly allow investors to trade fund shares instantly outside of traditional market hours and in smaller denominations, leading to greater efficiencies with fewer intermediaries and greater accessibility.
Federated Hermes currently sub-advises one fund that is distributed on blockchain in the US, but Cunningham explains it is not the asset manager’s own product, and Federated Hermes is working with partners that run the blockchain technology. “A broker dealer digitises the shares and puts them on the blockchain. We are doing what we can from our standpoint to help facilitate what seems to be buyers’ interest.”
Although demand for these funds is still small, she describes the rhetoric around future expectations for demand as “huge,” suggesting current demand may just be the tip of the iceberg as the market continues to evolve. She suggests future innovation could include 24-hour securities that pay hourly, for example.
Money Market ETFs
In another innovation, Federated Hermes is also exploring money market ETFs. Challenges around the process include the fact the ETF model is not based on stable net asset value, a key tenet of MMF that many clients seek. One way the offering could reach new customers is by taking an ETF that is invested like a MMF and use it like collateral in collateralised transactions, she concludes.
