Key Themes for Treasurers During 2019
By Jim Fuell, Head of Global Liquidity Sales, International, J.P. Morgan Asset Management
With the New Year celebrations now firmly behind us, Jim Fuell – Head of Global Liquidity Sales, International at J.P. Morgan Asset Management – gets back down to business by tackling some of the most important strategic challenges facing corporate treasurers over the next 12 months.
The implementation deadline for the new European Money Market Fund Regulations was January 21. What impact do you think the new regulatory regime will have on J.P. Morgan’s liquidity business?
There’s no doubt that preparations for regulatory reform in Europe have been challenging, for both corporate treasurers and fund providers. However, a great number of the changes have been positive and are to be welcomed.
We are fortunate that the size of our global liquidity platform, and the governance we already have in place around our money market funds, has allowed us to implement the regulations fully and ahead of time. With the recent clarification by the regulator that the reverse distribution mechanism used in euro-denominated money market funds will no longer be permitted, we will be undertaking a further modification to our euro money market funds which will be concluded by March 21 2019. The regulations have actually codified a large number of our existing risk controls and reinforced many of the things we have already been doing in our funds for some time.
I believe the more robust regulatory framework now in place in Europe will help money market funds to thrive. And I’m looking forward to engaging fully with investors to ensure they have access to the products they need to manage cash effectively in today’s increasingly challenging economic and interest rate environment.
Cash rates rose sharply in 2018, particularly in the US. What is the outlook for cash investors in 2019?
“Cash is back” was the mantra from the US in 2018, and I expect this theme to continue, extending beyond the US and becoming a global theme. Three-month Treasury yields pushed through the 2% mark towards the end of last year, hitting their highest level in more than a decade. Dollar money market yields actually rose above the yield available from many broader fixed income benchmarks – quite a turnaround following years of anaemic cash returns since the 2008 financial crisis.
The pace of US interest rate increases may slow in 2019 as the Federal Reserve assesses the strength of the US expansion. Nevertheless, the outlook remains positive, with dollar cash rates set to remain competitive against other asset classes this year.
Meanwhile, sterling and euro investors have so far not enjoyed quite the same pickup in cash yields as dollar investors. The Bank of England is raising rates, but is moving cautiously as it assesses the potential economic impact of Brexit. And the European Central Bank (ECB) is trailing well behind, with ECB president Mario Draghi maintaining current forward guidance on rates, saying that they will remain at -40 basis points (bps) “at least through summer” of 2019.
However, the direction of travel is the same, with interest rates globally very much on a rising path. It’s therefore important for treasurers to remain positioned for rising yields, and to be prepared just in case central banks move faster than expected. It can be painful when unable to respond quickly when the yield curve steepens.
Fig 1 Understanding an organisation’s cash needs