In brief

  • We believe that interest rates in developed markets have peaked, with central banks likely to initiate gradual cuts rather than returning to the near-zero levels seen in recent years.
  • The anticipation of declining interest rates, alongside a resilient macroeconomic outlook and favourable all-in yields, could present one of the best environments for standard money market strategies in the last 15 years, in our opinion.
  • Standard money market funds (MMFs) have the potential to deliver incremental returns over short-term MMFs by assuming slightly more interest rate and credit risk while still maintaining a focus on capital preservation.

Global economy is resilient as interest rates peak

Interest rates have experienced a significant increase since 2022 but we believe they have likely peaked. Declining inflation across developed markets has prompted central banks to contemplate rate cuts. However, we expect these reductions to occur gradually, without reverting to the near-zero levels of recent years. The global economy has demonstrated remarkable resilience despite higher interest rates, partly due to tight labour markets driving up wages. We anticipate that the enduring trend of an aging population in key regions will sustain tight labour markets, potentially maintaining inflation and interest rates above the exceptionally low levels observed for much of the post-financial crisis period.

Macro backdrop supports stepping out into Standard Money Market Funds

We believe that the potential for interest rates to fall, a stable macroeconomic outlook and the all-in yields on offer could present one of the best environments in the last 15 years for global liquidity investors to consider stepping out into standard money market funds.

This environment allows for opportunistic addition of both duration and credit risk in standard MMFs, a notable departure from the caution exercised in the past two years.  This enhances the potential for standard MMFs to deliver incremental returns over short-term MMFs, targeting 15-30 basis points (bps) of annual outperformance.

Guidelines for standard MMFs permit investments with longer duration and slightly higher credit risk. Specifically, standard MMFs can extend their weighted average maturity to 180 days compared to 60 days for short-term MMFs, which is typically advantageous during periods of falling interest rates.

Standard MMFs also have the flexibility to seek higher returns by assuming incrementally more credit risk through investments in BBB-rated securities. This broader universe of securities not only enhances diversification but also encompasses a wider range of businesses, including industrial companies. In contrast, short-term MMFs are restricted to securities rated A or higher, with a predominant focus on financial companies.

Transitioning from short-term to standard MMFs

At J.P. Morgan Asset Management, our standard MMFs are part of our USD 1 trillion Global Liquidity business and share many features of our short-term MMFs.  Both prioritise principal preservation and are classified as money market funds under European regulations. Moreover, our standard MMFs benefit from our robust risk management practices, including our approved-for-purchase list.

Importantly, clients can easily shift from short-term to standard MMFs within the same account, facilitating the implementation of a cash segmentation strategy that can potentially enhance returns.

It’s not too late to consider standard MMFs in your cash portfolio

Given the current environment, with anticipated declines in interest rates and a stable macroeconomy, now may be an opportune time to embrace increased duration and credit risk in cash portfolios.