Not all money market funds are equal | Insight Investment

• The prevalence of negative money market rates during much of the last decade led many treasurers to compromise on liquidity and credit quality to achieve higher yields on their cash allocations. The rise in interest rates since the end of the pandemic offers an opportunity for cash investors to achieve higher yields without compromising either.
• We believe the closure of several US banks and the subsequent uncertainty in the US and European banking sectors bolsters the case for a diversified and highly regulated vehicle like a money market fund (MMF). However, not all MMFs possess identical characteristics and the benefits offered by each category of MMF vary.
• In our view, Low Volatility NAV (LVNAV) MMFs represent the best solution for cash investors and treasurers seeking stability and liquidity. They possess several advantages over Short Term Variable NAV (VNAV) MMFs and Standard Money Market Funds (Standard MMFs), including shorter maturity of the underlying assets, lower volatility, and higher liquidity.
  
  

Money market investing in 2023 – yield without excess duration

For much of the last ten years, European money market investors endured a combination of negative-yielding short maturity fixed income assets and cash deposits due to negative ECB deposit rates. During that time, many money market fund investors stretched for positive yields either by investing in longer duration funds or comprising on credit quality.

The rise in interest and deposit rates since mid-2022 pushed up the front end of curves, effectively transforming the landscape for European cash investors. As a result, many European corporate treasurers now reprioritise the security and liquidity of their cash balances instead of mitigating the effects of negative interest rates on bank deposits and short-term funds.

For many treasurers, the general case for a partial allocation of bank deposits to money market funds seems to be clear: Bank deposits are not invulnerable to unfavourable market conditions, as indicated by the recent stresses in several European and US banking institutions. MMFs access a diverse pool of assets and achieve a high level of security. They offer corporations the ability to buy-in specialised credit and risk analysis together with additional benefits, such as ESG integration.