Five days ago, I realised that I had completely lost my sense of taste and smell. It’s quite a peculiar sensation when tea or coffee tastes of nothing but something hot, and a fresh juice laced with ginger and turmeric tastes bland.

Meanwhile, in the short-term markets, liquidity has been at a premium in recent weeks. Money market funds (MMFs) have been focusing on increasing their weekly liquid asset (WLA) holdings to levels much higher than normal. While European regulations call for a minimum of 30% WLA, funds often hold north of 40%, and in recent weeks have looked to increase this further. This follows choppy flows in March, driven by margin calls as a result of longer-end volatility, the cash needs of businesses struggling with the lack of economic activity, and inflows of drawn credit facilities or cash from economic sectors still booming.

MMFs are keen to build natural liquidity as there has been a degradation of secondary liquidity for longer-term holdings, with dealer balance sheets bloated and banks constrained by capital ratios. As MMFs build liquidity, they are also less active in term markets. Issuers and banks have found less willing buyers for term paper, which has pushed offer yields higher despite rate cuts from the central banks. Some central banks have gotten the picture, notably the Federal Reserve, which has established the Money Market Mutual Fund Liquidity Facility to allow MMFs to liquefy US bank, agency and treasury holdings in a balance sheet neutral way for dealers. This facility has helped onshore USD markets to begin to normalise. On the offshore markets, the Bank of England’s Covid Corporate Financing Facility (CCFF) and the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP) have targeted much smaller sectors of MMF holdings and therefore, in their current form, aren’t expected to contribute greatly to the unfreezing of front-end markets.

As MMFs continue to build WLA, as of 25 March, there are some signs of unfreezing, but mostly in short sub-one-month purchases, as MMFs look to mop up some extra cash while keeping funds very liquid and reducing duration. So although MMFs are not yet back in the market, we believe that they’ve not completely lost their taste for buying. However, without support from central banks in the offshore space, MMFs will likely be slow to get back up to full speed in purchases and duration.

Meanwhile, today, there are some signs that I can taste ginger again and I hope that it may mean I have gotten through the Covid-19 infection (one can’t currently get tested) with only one of the mildest side-effects. Wishing you all the best of health and happiness. #staysafe!