Maud Debreuil (AXA IM): Money Market Funds - A Resilient Anchor Amid Rate Cuts and Market Turmoil
Despite recent rate cuts by the European Central Bank and ongoing market volatility, money market funds continue to demonstrate their relevance and resilience. These funds, often seen as safe havens, have not only weathered economic storms but also maintained their appeal through active management and strategic liquidity positioning. At a time when uncertainty dominates financial markets, understanding how these instruments adapt and thrive is more important than ever.
Why do money market funds remain attractive despite decline in rates and how do you manage during this phase of uncertainty and volatility?
Since the end of negative rates in mid-2022, money market funds have seen significant success marked by a robust 40% increase in outstanding amounts within the panel of euro-denominated funds we monitor at AXA IM. While the allure of short-term rates has been a key driver for this growth, we find that outstanding amounts have continued to rise (+12% in our panel) even after the rate cuts that began in June 2024. This resilience can be attributed to the outperformance of the funds and the strength of our management processes.Money market funds serve as an effective tool for liquidity investment, offering numerous benefits, including a high degree of security with low risk, daily liquidity access, and substantial diversification within a stringent regulatory framework. The ECB's rate cuts directly influence money market funds, as their reference rate, €STR, is closely tied to the ECB's deposit rate. However, we still observe short-term rates that are above the average of the past 15 years, and active management of interest rates and credit enables us to optimize the yield of our money market funds. Since the implementation of the Money Market Fund Regulation (MMFR) in 2019, we have navigated several crisis phases, with money market funds adeptly adjusting to various market contexts and anticipating the effects of these crises more effectively. Although the MMFR mandates 7.5% liquidity on a daily basis, the majority of money market funds currently maintain approximately 15% to 20% liquidity, which is no longer detrimental to performance. The levels of WAL (Weighted Average Life) and WAM (Weighted Average Maturity) in our funds are tailored to deliver optimal returns while balancing acceptable levels of liquidity and risk based on market conditions.
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In times of uncertainty and volatility, our primary objective is to lower the risk profile of our funds by prioritizing liquidity and safety. This approach leads us to enhance daily liquidity and focus on issuers, maturities, and instruments that provide the highest liquidity, with yield becoming a secondary consideration. In the current climate of market instability, we have faced since the beginning of the year, diligent interest rate management and cautious credit strategies can yield outperformance. We have experienced extreme volatility, with daily fluctuations occasionally reaching ten basis points, necessitating fully hedging our funds and completely indexing them to the €STR reference rate for safety. At AXA IM, we actively manage our money market funds' sensitivity to interest rates based on market expectations and our convictions regarding the terminal rate in this easing cycle. Additionally, the recent rise in credit spreads on commercial papers since April enables us to offer an attractive carry level without increasing fund risk, while maintaining strong diversification across sectors, issuers, instruments, and maturities. We strive to optimize the risk/return profile of our funds by considering the remuneration levels of various issuers and the structure of their yield curves, allowing us to identify the best relative value opportunities. Furthermore, our extra-financial selectivity related to the SRI label of our money market fund range enables us to exclude certain issuers and mitigate potential future credit risks, such as those associated with US banks (where less regulation is anticipated) or issuers in the automotive sector (which faces high volatility).
“In times of uncertainty and volatility, our primary objective is to lower the risk profile of our funds by prioritizing liquidity and safety.”
Why money market funds remain important for regulatory authorities?
In 2017, the European Parliament approached the reform of money market fund regulation from two perspectives: first, recognizing that money market funds provide short-term financing to financial institutions, corporations, and public administrations; and second, acknowledging that they serve as tools for short-term cash management from the demand side.
This concept of providing short-term financing for the Union's economy is crucial for these institutions, as financing through commercial papers offers numerous advantages: flexibility in financing (with maturities ranging from 1 day to 1 year), a rapid issuance process to address liquidity needs, access to financial markets that facilitates diversification of funding sources, and a broad array of investors, often resulting in lower borrowing costs. For instance, we have seen an uptick in corporate commercial paper issuances since the "liberation day", responding to market volatility and uncertainty. Some bond issuances have been postponed, leading to an increased demand for short-term financing. In April, the outstanding corporate commercial paper rose by 20% in the Euro Commercial Paper program and by 13% in the Neu CP, resulting in a total monthly increase of just over €19 billion, bringing the total to approximately €118 billion by the end of April. The European Central Bank remains vigilant regarding the evolution of money market funds and short-term financing for the Eurozone economy. It intervened to support issuers during the Covid period in 2020 and ECB must ensure that money market funds remain resilient to economic shocks and to mitigate systemic risks that could threaten financial stability, which includes requirements for liquidity and transparency. That’s why the regulation may continue to evolve to better align with current market needs, potentially introducing additional constraints on cash, valuation, and stress tests. With over €2,000 billion in assets under management in funds domiciled in Europe under MMFR, authorities remain watchful and closely monitor the development of money market funds to protect investors and uphold financial stability.