This week’s headline news has certainly highlighted lots of financial market volatility. SIA is committed to putting the most important events into context for our clients.
During the past week, we have studied our client allocations to money market funds as these holdings in a portfolio are used to meet each client’s withdrawal needs during the next 12-18 months.
This allocation is expected to earn a slight rate of interest, while assuming no risk of a decline in the principal balance. During the past ten days, we have witnessed unusual volatility in the bond markets that appears to reflect some illiquidity. In addition, interest rates have fallen dramatically this year and the yield being provided by these relatively “safe” investment vehicles has also dropped to very low levels.
SIA’s Investment Committee conducted a review of the money market funds we utilize for our clients and determined that the best investment strategy for these balances, for now, is to insure that the principal remains stable.
As a result of our research, we have recently moved out of municipal and prime money market funds and into those which are invested in U.S. Treasury backed investments. If clients receive notice of a trade this week from their custodians, the trade reflects this decision. In summary, the new fund we have selected will:
- be comprised of 100% of United States Treasury Bills and Notes that we have full faith that the government will repay this debt.
- offer currently a 100% daily and weekly liquidity ratio.
- have a large asset base to support requests for redemptions.
- will not charge a liquidity fee or impose a redemption gate on withdrawals.
We believe that this move provides clients an accessible and liquid allocation that will maintain its value until we return to a more orderly and calmer bond market environment. The Committee will continue to review this fund to ensure that it maintains our expectations of zero loss of principal.
The Federal Reserve, in conjunction with the U.S. Treasury, recently announced the reinstitution of the Liquidity Facility (MMLF), a move that we applaud as it supports our decision. Essentially, the MMLF is a preemptive action to support Prime money funds (which hold less liquid non-Treasury holdings) in meeting redemptions via low-cost collateral loans that would reduce their yield. A very similar facility was used successfully during the 2008-09 credit crisis.
Our decision to move into a fund with zero corporate or municipality exposure and a 100% daily liquidity ratio may lower the yield we earn on these balances in the short-term, but guarantees that these allocations are invested in U.S. Treasuries that have been, and remain, the deepest and most liquid bond market in the world.