Following the launch of the Federal Reserve‘s new lending facility to backstop the money-market mutual fund sector, Janney’s Vice President / Director of Cash Management & Lending discusses strategies to guard against losses.

During this time of unprecedented market volatility and uncertainty, investors are looking for safe havens to protect their assets, especially investing cash in short-term instruments like Money Market Funds, Insured Bank Deposits, Certificates of Deposits (CDs), and Treasuries.

Money market funds

A prime money market fund is a fund that may invest in highly liquid instruments with maturities less than 13 months such as commercial paper, corporate, government, agency, Treasury bonds, CDs, and cash. It’s also known as a fund that is not a government or tax-exempt money fund. Since the Federal Reserve (Fed) decreased rates to zero on March 15, 2020, there has been unprecedented movement by the Fed and the Treasury to ensure the investments that prime money market fund managers invest in can be traded, providing our investors some sense of protection.

In mid-March 2020, prime money market funds came under scrutiny with concerns over liquidity in the commercial paper market. Commercial paper is unsecured short-term debt security sold by large corporations in order to obtain funds to meet short-term debt obligations such as payroll, accounts payable, and inventory needs. The Fed saw the increased pressure on the commercial paper market, and opened the Commercial Paper Liquidity Faculty (CPFF). The Fed reopened the CPFF (originally established in 2008) to provide liquidity to U.S. issuers of commercial paper in the event that there was not enough credit available in the market. By providing liquidity to the commercial paper market, the CPFF encouraged investors to resume lending in the market. Read more about the Fed’s CPFF announcement here

On March 18, 2020, the Fed took another step to reassure investors in prime money market funds that there would be continued liquidity by opening the Money Market Mutual Fund Liquidity Facility (MMLF). The MMLF looks to assist money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy. Read more about MMLF news here.

As of March 20, the Fed is also offering (through the MMLF) added liquidity for short-term high-quality municipal bonds by loaning money to banks to purchase muni bonds from money market funds or muni bond funds. Even considering these enhancements by the Fed, some investors may prefer money market mutual funds with less risk, such as government money market funds.

Funds with this designation are required to have at least 99.5% of their assets invested in very liquid investments such as cash, government securities, and/or repurchase agreements that are collateralized fully with government securities.

Alternatives to money market funds

Bank deposit offers a simple strategy for immediate cash liquidity (for example, securities trading, paying bills, or covering immediate cash outlays). Cash set aside in an Insured Sweep Bank Deposit Program will be FDIC (Federal Deposit Insurance Corporation) insured up to $250,000 per person, per bank.

Janney offers a Bank Deposit Program that will automatically sweep any amount in cash (generated from trading, dividends, interest, etc.) into one or more bank deposit programs to insure cash up to $2.5 million per individual and corporation, or $5 million for joint accounts. This amount is available for distribution when you need it. CDs (issued by banks or brokerage firms) are an option you may want to consider for cash set aside in case of an emergency for a longer period of time, typically exceeding a year or more.

CDs provide FDIC insurance coverage for up to $250,000 per individual, per institution. T-Bills offer a secure way to invest cash for a period of time, while keeping your principal safe and secure. They offer maturities anywhere from three months to one year, depending on your circumstances, and have a minimum investment amount of $1,000. There are no penalties if sold prior to maturity (beyond sales commissions), and you will receive your initial investment and accrued interest. T-bills offer peace of mind knowing that your principal amount is backed by the full faith and promise of the U.S. government.

For more information read What is the Right Amount of Cash to Cover Your Short-Term Needs? here.

*The term “recapitalization” refers to any significant change in a company’s capital structure, typically involving the introduction of new debt and/or equity.

Investment products offered are not insured by the FDIC or any other government agency. They are not deposits or obligations of, or guaranteed by the financial institutions where offered. They also involve investment risk, including the possible loss of principal.  Past performance is not an indication of future results.

 

About the author

Jeff Scharf

Director of Cash Management & Lending

Read more from Jeff Scharf

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