4 Money Market Questions for the 4th Quarter
After a year of money market drama, investors are eagerly looking forward to how 2020 will wrap up and what 2021 may bring. Director of Money Markets and Portfolio Manager Dan LaRocco offers his insights.
What happens to money markets if Congress doesn’t approve new COVID-19 stimulus?
The odds now seem stacked against another stimulus package considering the elections. This is against the initial expectations of many — myself included — that it would happen. No stimulus package means no additional financing needs, and therefore, a likely decline in the available supply of Treasury bills (short-term government debt used in money markets) in the fourth quarter. As long as buyer demand remains healthy, lower supply likely means short-term yields will grind lower throughout the fourth quarter and is supportive of our current duration position.
If additional fiscal stimulus is passed after the election early in 2021, the environment might be supportive of an uptick in supply but that’s a long way off in money market land and is unlikely to impact this quarter.
Will investors flee from near-zero money market yields?
The reality is that for the foreseeable future there aren’t a lot of places to hide and earn any yield in traditional cash management vehicles with Fed policy rates near zero. Keep in mind that uncertainty and volatility across riskier assets historically tend to increase with U.S. elections; therefore, we could see a slowing of money market fund outflows or even some risk-off inflows, which would pose further downside risk to money market rates.
Is there a risk of money market disruption through the end of the year?
With the Fed and other central banks throwing everything they have to support liquidity in the money markets, a calm conclusion to an otherwise volatile year is expected.
What does 2021 hold for money markets?
Money market fund reform will likely be a topic of continued conversation in the fourth quarter and into next year, as we continue to hear more and more from regulators such as the SEC and the Fed that they continue to scrutinize a need to further refine the rules that govern money market funds after this year’s disruption in liquidity during the global pandemic.
Learn more about liquidity strategies at Northern Trust Asset Management.
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