Surging demand for U.S. Treasury bills (Tbills), in a “flight to quality” sparked by the coronavirus pandemic, created unusual market conditions. Our fund managers explain why they don’t see negative Tbill rates ahead in 2020, how on- and offshore funds differ, and J.P. Morgan’s government funds are positioned to expand capacity.

Technical variables in the U.S. Treasury bill market

Why did U.S. Treasury bills trade at negative rates?

As the COVID-19 pandemic spread in March, the US Federal Reserve (Fed) took emergency actions to support the economy, including cutting its target federal funds rate by 150 basis points (bps). Meanwhile, investors fled equity markets for safer alternatives, many for the safety of Treasury securities and U.S. government money market funds (MMFs)—a “flight to quality.” This demand surge created a supply-demand imbalance that drove Treasury bill (Tbill) yields negative, out to six months on the yield curve.

Has J.P. Morgan Global Liquidity bought any negative-yielding Treasury bills?

We have not purchased any negative-yielding instruments and do not intend to do so.

Then how do you manage MMFs that are invested 100% in these securities?

Every week, the U.S. Treasury auctions 1-, 2-, 3- and 6-month Tbills. The vast majority of our trading centers on these weekly auctions.

Why are Tbill yields currently positive?

Since the start of the pandemic, the U.S. government has passed three rounds of fiscal stimulus with a fourth expected—all funded by the Treasury Department through the massive issuance of Tbills, the most direct way it can raise cash. Larger weekly Tbill auctions and include significant issuance (USD620 billion, to date) of Cash Management Bills (CMBs)¹ — providing a steady supply for USD Treasury MMFs and by repairing the supply-demand imbalance, driving yields into positive territory.

What are your Tbill supply and yield expectations for the rest of 2020?

We expect the size of weekly Treasury auctions to further grow, and for CMB issuance to continue. The result should be sufficient supply and positive Tbill yields through 2020.

Our approach to managing USD Treasury funds and repos, onshore and offshore

Are there differences in the management of Treasury funds that can enter into repurchase agreements (repo)² vs. those that cannot?

Money market funds that can engage in repo—accessing both overnight dealer and fed repo—can use it to help smooth out instances of limited supply, thin liquidity and negative rates.

Generally, how do we think about managing onshore vs. offshore funds?

While both types of funds are managed similarly, some regulatory differences limit an offshore Treasury fund’s investment universe. The Fed’s Reverse Repo program is only open to U.S. domiciled funds, so our offshore products are ineligible. When repo supply is limited, our team typically rotates into Tbills maturing within one month. Offshore funds are limited to a 397 day tenor on all floating-rate securities; domestic funds can purchase floaters up to 762 days. Another difference: European money market rules limit exposure to repo counterparties to 15% of assets under management (AUM); for domestic funds, the limit is 25% of AUM.

Capacity in USD Government funds

J.P. Morgan Asset Management has two funds with more than USD100 billion in assets under management. Do our funds have the capacity to take additional cash?

Yes. We view growth as a positive, at J.P. Morgan Global Liquidity and in the money market industry as a whole.

How do we think about managing large funds?

We take a collaborative, team-based approach to managing all of our funds. Our experience, resources and market share are competitive advantages that allow us to provide world-class service with uncompromised risk management. Since the primary pillars of our mandate are liquidity and capital preservation, we place great emphasis on daily and weekly liquidity levels. Our security selection process is based on liquidity, supply and relative value. Finally, we believe that communication and transparency are key to managing large funds so that our portfolio managers can act on information in a timely, thoughtful manner. Active dialogue with clients through our distribution team is integral to managing flows across our products. We greatly appreciate the trust that our partners place with us as fiduciary managers of their liquidity.

Can the supply of government securities keep up with the continued growth of AUM in money market funds?

Yes. With the exception of the supply-demand imbalance noted above, we see a diverse, mature, liquid investable universe for our USD Government platform. Depending on fund mandate, we can invest in traditional tri-party dealer repo, U.S. Treasury bills and notes, and U.S. agency debt issued by FHLB, FHLMC, FNMA and FFCB³. Many of our funds are also eligible for up to USD30 billion per fund in the Fed’s Reverse Repo Program. We have, at any point, access to trillions of dollars (and growing) of notional supply.

¹ Securities sold irregularly, to institutional investors, to meet unusual short-term government funding needs, typically at terms of 20 days or less.
² Short-term collateralized loans, typically secured by Treasury securities.
³ FHLB: Federal Home Loan Bank; FHLMB: Federal Home Loan Mortgage Bank (Freddie Mac); FNMA: Federal National Mortgage Association (Fannie Mae); FFCB: Federal Farm Credit Banks Funding Corporation.