Liquidity Insights

The case for standard money market strategies amid non-recessionary rate cuts

In brief

  • Standard strategies aim to outperform short-term strategies by taking on slightly more duration and credit risk.
  • In the past year, our USD standard strategy has doubled to over USD 11bn, and our EUR standard strategy has almost doubled to over EUR 5bn.
  • Standard strategies can extend Weighted Average Maturity (WAM) up to 6 months, compared to 60 days for short-term strategies.
  • Standard strategies can invest in A-2/BBB rated securities, offering higher yields and sector diversification.
  • Standard strategies are well suited to periods of falling interest rates without a recessionary backdrop.

Standard money market strategies aim to outperform short term money market strategies by taking slightly more duration and credit risk, while still aiming to preserve capital and maintain a high degree of liquidity.

We have seen very strong growth in our standard money market strategies recently. Over the last year, our USD standard strategy has doubled in size to over USD 11bn, while our EUR standard strategy has almost doubled to over EUR 5bn.

Why are cash investors turning to standard strategies?

With interest rates starting to fall, cash investors are looking to money market strategies that can extend the WAM of their cash portfolio beyond that of short term money market strategies. By extending their WAM, standard strategies aim to outperform short term money market strategies in a falling yield environment.

While short term money market strategies are only permitted to extend their portfolio WAM up to 60 days, standard money market strategies are able to have a maximum portfolio WAM of up to 6 months.

Another tool available to standard strategies is the ability to purchase slightly lower rated and hence higher yielding credit. While short term money market strategies have a minimum security rating of A-1/A, standard money market strategies can purchase A-2/BBB rated securities. Beyond the additional yield potential, this also allows standard money market strategies to diversify their sector exposure away from the financial issuers, which constitute a large part of the short-term money market investment universe.

Some other important considerations for investors are that standard strategies settle T+1 and have a variable net asset value (NAV). For investors who don’t need same day liquidity and can handle modest volatility in the NAV, standard strategies offer the potential for higher returns on their cash.

Exhibit 1: Summary of key differences between short-term and standard strategies

step-out-strategies-blog-exhibit-1

Source: J.P. Morgan Asset Management, as at 30 September 2024.

The best environment for standard money market strategies

With the ability to take more duration and credit risk, we believe the best environment for a standard strategy is one of falling short-term government bond yields and tightening or stable credit spreads. During recessions, government bond yields tend to fall as central banks cut interest rates but credit spreads also tend to widen as corporate profits come under pressure.

We believe the best economic environment for a standard money market strategy to outperform a short-term money market strategy is therefore when interest rates are being cut, without the backdrop of a recession. Historically, that’s quite unusual.

Exhibit 2: Interest rate cuts tend to coincide with recessions

step-out-strategies-blog-exihibit-2

Source: LSEG Datastream, J.P. Morgan Asset Management, data as at 30 September 2024. Periods of recession are defined using US National Bureau of Economic Research (NBER) business cycle dates.

However, we believe that we are currently in an unusual environment where central banks will cut interest rates further, against a non-recessionary backdrop. While job growth is showing signs of slowing, we are not seeing net job losses in either the US or Europe and our base case is that we will see slower but still positive growth over the next year.

Conclusion

Non-recessionary rate cuts could continue to support the case for cash investors to step out from short-term money market strategies into standard money market strategies with a portion of their cash that has a longer investment horizon and doesn’t require same day liquidity.

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