In a webinar on topics from the 2023 AFP Liquidity Survey, underwritten by Invesco, treasury professionals discussed several aspects of the current market, including a shift in allocation from bank deposits to money market funds, money market fund reforms from the Security and Exchange Commission (SEC), and where the Fed is headed next.

Over the past year, bank deposits have ebbed and flowed, though in March 2023 we saw a major shift happen as a result of the regional banking crisis. 

“Bank deposits have been the number one driver in the allocation of short-term operating cash balances,” said Tom Hunt, CTP, Director, Treasury Services and Payments for AFP. “Underneath that is the overall relationship with the bank; it’s the number one driver of that. That's still the case, although it dropped about 10% in level of importance.” 

One of the biggest findings from AFP’s survey is the amount of allocation change from bank deposits to money market funds. Organizations’ cash and short-term allocation to bank deposits dropped to 47%, down 8 percentage points from 2022 and the lowest recorded figure in four years. Meanwhile, 38% of survey respondents reported that their organizations plan to continue increasing their cash allocations to Government/Treasury money market funds into the next year.

When asked if his company is planning to move balances into money market funds, one treasury professional explained that before he made changes at his company, they were leaving all their money in bank deposits and simply negotiating the rates.

“I implemented a money market portal and wrote the investment policy around that,” the treasury professional said. “We've started moving funds slowly. The company is new to the product, but they've gotten very comfortable very quickly. We'll put more and more funds into the money market. That 1% makes a big difference when you're talking about significant balances.”

Another treasury professional added, “My organization doesn’t have a long-term money market fund strategy. If there's a recession next year, you're probably not going to put money in a money market fund because maybe the yields wouldn't be there when the rates go to zero. But if it stays stable, then I'm more inclined to do that.”

Money Market Fund Reforms

On July 12, 2023, the SEC made an announcement regarding money market fund reforms. One of the measures announced in the final rule was an increase in the liquidity requirement for money market funds to 25% of a fund’s total assets in daily liquid assets and 50% in weekly liquid assets.

The SEC also removed the temporary redemption gates and the tie to weekly liquid assets. They previously tied temporary gates and potential liquidity fees to certain trigger levels — weekly liquid assets — which effectively perpetuated or aggravated a run situation.

Additionally, the SEC instituted a requisite liquidity fee. This is a mandatory liquidity fee that is applied only on institutional prime and institutional tax-exempt money market funds, so retail products and government and treasury products are exempt. 

Where the Fed is Headed Next

When the Fed started raising rates, money funds, especially Government Money Market Funds, gained assets because organizations wanted to receive higher rates at a faster pace than their bank deposits were reflecting. This, along with the regional bank crisis, caused many to seek more diversification.  

It’s important to note the majority of the money fund industry is government — 82% is government funds, and over 60% is institutional.

The market expects the Fed to cut rates sometime next year. “The Fed has been very hawkish in their rhetoric,” explained Laurie Brignac, Chief Investment Officer at Invesco Global Liquidity. “We still have a strong labor market and the Fed is clearly focused on inflation and inflation expectations. They want to make sure that inflation expectations remain anchored. Powell's been very clear that their inflation target is 2%.”

Brignac went on to explain that while there are a lot of different measures of inflation, the core tenets haven’t changed: “The market is having discussions and debates about whether we are settling at a new, higher natural level of inflation. Whether you think the new natural level of inflation is 2% or perhaps 3%, either way, the overall inflation numbers have been coming down and they've been coming down significantly.”

The healthy drops are a good thing. The Fed is being prudent; they want it to continue to go down.