A letter from our CEO John Donohue
We are dealing with an extraordinary global COVID-19 crisis and an unprecedented financial markets environment. Throughout our history, JPMorgan Asset Management Global Liquidity has helped clients navigate shifting market environments while drawing on JPMorgan’s global resources and expertise to deliver effective short-term fixed income strategies. This current, extraordinary environment is no different.
Subsequent to the end of twelve months reporting ended February 29, 2020, a global erosion in equity prices, government bond yields dropping to historical lows and oil prices collapsing led to industry-wide large redemptions from prime money market funds, which typically invest in short-term taxable commercial debt securities. Investor concerns that liquidity would evaporate in the market for these funds drove a sharp increase in asset outflows in the first two weeks of March 2020. Conversely, U.S. government and U.S. Treasury money market funds saw significant asset inflows during this time. JPMorgan government and Treasury money market funds have seen large net asset inflows and assets under management in the JPMorgan U.S. Government Money Market Fund have swelled to more than $200 billion from about $150 billion at the end of 2019.1
The U.S. Federal Reserve (the “Fed”) responded swiftly in March taking aggressive actions, including reducing its target range for the fed funds interest rate by 50 basis points (bps) on March 3rd and then again by another 100bps less than two weeks later on March 15th to its effective lower bound of 0-25bps restarting its quantitative easing program, committing to purchase an unlimited amount of U.S. Treasury bonds and mortgage-backed securities; lowering the primary credit rate at the discount window by 15 bps to 0.25%; and lowering required bank reserved ratios to zero. In the following weeks, prime money markets largely stabilized but by the end of the month an estimated $157 billion in assets – roughly 14% of industry-wide money market assets under management -- had been redeemed by investors in prime money market funds.2
Fed policy actions included other measures designed to support market liquidity and the flow of credit. The central bank created the Commercial Paper Funding Facility and the Money Market Fund Liquidity Facility and reinstated its Term Asset-Backed Securities Lending Facility in addition to interest rate reductions. These actions -- plus a $2.3 trillion stimulus package from the U.S. Congress – resulted in improved liquidity for front-end fixed income markets. By April 15, JPMorgan’s prime money market funds had recorded net inflows of about $20 billion, recovering about 70% of assets under management that had flowed out of our prime funds from March 12 to March 31.3 We believe the experience and knowledge of the JPMorgan Asset Management Global Liquidity team and JPMorgan’s standing as one of the largest global providers of prime money market funds provides us with the expertise and scale to continue to serve our fund shareholders in the face of the global impact of COVID-19.
In the larger picture, market data have displayed some uncanny similarities in directionality and magnitude between the current global crisis and the financial crisis of 2008-09. The market data for both periods show sizable declines in equity prices, indicating a significant weakening of corporate profitability. Additionally, in both periods we can see a greater widening in front-end credit spreads than in long-term credit spreads, indicating a pronounced lack of liquidity in the short-term fixed income markets. Furthermore, the current monetary response is also similar to actions taken in 2008-09, with the Fed implementing a zero interest rate policy and making large-scale asset purchases.
Notable differences, from a markets perspective, include the depth of the labor market stress, the size and speed of the U.S. government’s fiscal response and the health of the U.S. financial system. Recent initial weekly jobless claims have hit record highs, which indicates there will likely be more short-term stress on the average consumer in the current downturn than during the 2008-09 financial crisis and recession that followed it. However, the U.S. Congress’s fiscal rescue response now totals nearly double what it approved during the 2008-09 financial crisis and it appears that there is Congressional support to do more, if necessary. Additionally, the banking system today remains relatively strong, which should enable the Fed to funnel capital to those segments of the economy that need it most.
Over the long term, our significant and long standing investments in both talent and technology allow JPMorgan Global Liquidity to continue to provide our clients with opportunities and solutions throughout market cycles and global turmoil. We thank you for your continued partnership and trust in our company and our products.
John T. Donohue
CEO of Asset Management Americas, Head and CIO of the Global Liquidity Business
1 Cranedata.com, April 15, 2020.
2 Cranedata.com, March 31, 2020.
3 Cranedata.com, April 15, 2020.