News Archives: April, 2025
Today, we continue to quote from our recent Bond Fund Symposium conference, which was held late last week in Newport Beach, Calif. The "Senior Portfolio Manager Perspectives" featured Crane Data's Peter Crane moderating a session with BlackRock's Richard Mejzak, UBS Asset Management's Dave Rothweiler and Federated Hermes' Nicholas Tripodes. We first asked Mejzak about BlackRock's recent launch of Money Market ETFs. He tells us, "They're on the smaller side. However, the growth has, I think, exceeded expectations thus far.... This is not your father's money market business.... Clearly, the market's evolving in this space." (Note: Attendees and Crane Data subscribers may access the conference binder, Powerpoints and recordings via our "Bond Fund Symposium 2025 Download Center.")
Mejak explains, "I think several things led us to this. I mean, first off, it seems that cash, we would expect, is going to remain an asset class, right? Yields, they're 4% now. But if you look back historically, like 3.0, 3.5% seems to be the magic number as far as absolute level of yields. And if you can maintain that allocation to cash, we would expect to maintain, kind of balance, as to where they are. So that was one driver of it."
He continues, "Two, the ETF wrapper, without question, is becoming, the wrapper of investor preference. So, we felt getting a product into an ETF wrapper would be an incredibly effective tool. Then lastly, what we saw with money market fund reform, specifically around prime money market funds and ... how they were going to implement discretionary and mandatory fee structures. We thought an ETF would help the marketplace in that ... a lot of the liquidity in and out of an ETF is done on an exchange and not within the fund itself. So, we thought that would actually improve the kind of the operational aspects of those two types of fees."
Mejzak adds, "I mean, it's no surprise ... in the marketplace now there's tons and tons of models that are comprised exclusively of ETFs. So, if you want to have a cash allocation within that, this is a product that fits very well in there."
Discussing supply in the ultra-short space, Tripodes comments, "Last year, I think there was over $300 billion in U.S. issuance of ABS, which was pretty much a new record. And we think this year should be kind of similar from a new issues standpoint. And like I said, in looking at subprime, we're kind of sticking to the higher quality subprime names."
He says, "Because when you do see a spike in unemployment, like some of the smaller subprime issuers that maybe are private equity-backed and don't have sources of financing, like a GM, in the corporate market or the equity market or bank lines of credit, they could experience issues, some of these smaller companies. And if they do have servicing issues, then, that causes all types of problems. So you have to be careful."
The Federated PM comments, "But overall, we really like the ABS market. And we think it's a really nice asset class, especially for short-duration securities. Because you're getting your amortization every month, for the most part, once your bond starts paying down in autos and equipment. And it's just the short-weighted average life is a nice fit for, one- or two-year short-term bond product."
Rothweiler weighs in, "In terms of what I'm buying, I mean, we're an IG strategy. And, like yourself, we're focusing more and more with an up-and-quality focus. You focus on ABS. And for us, we're staying away from subprime. We're in the prime space, more nominally like AA3 or better. And from introducing another asset to the sector, you're definitely, on that northwest efficient part of the frontier, from a risk-return standpoint."
He states, "But, within the corporate space, focusing on financials, we think credit overall is still pretty good. But like it was mentioned this morning, you look at stuff like the autos, you have some pockets of volatility. But for us, it depends where the maturity is for that kind of paper. In terms of what we're not buying, as I said, we can't do high-yield or split-rated. But we're also staying away from the lower BBB realm."
Mejzak also tells us, "If you look ... just from a pure valuation perspective, especially when you talk about credit spreads, which look kind of beyond the tighter end of the range, especially when you think about where we are in the economic cycle. However, just the overall carry of, I'll call it one to five-year kind of fixed-income assets is incredibly compelling. But the amount of movement you need in yields to actually lose money at these absolute levels of interest rates and carry is massive, right?"
He explains, "So, I'd say consistently the folks that we talk to, or let's say our separate account clients and big corporations that we run money for, really are just comfortable adding carry here, high-quality carry, that is, and being comfortable clipping the coupon, knowing that that coupon is going to be able to endure a pretty severe movement in interest rates. I mean, what we heard from the Fed a couple weeks back was, they had two options. They're either going to stay put or they're going to cut rates. I didn't hear anything about raising rates, right? So, in that environment, I think carry is the game."
Asked what he's buying, Tripodes comments, "It depends on the strategy. So, on our Micro-Short strategy, that's really a combination of liquidity, securities, and bonds, about 50-50. So, in that portfolio, we don't buy anything past two and a half years for fixed rate, three years for floater. We have a 15% BBB limit and no high yield. Now, as we move to the Ultra Short Fund and Short-Term Income Fund, `we have the capability to buy high yield. I know there's discussions on CLOs. We have a pretty deep high yield team. So instead of buying CLOs, I mean, yeah, you can buy the AAA rated CLOs, but the underlying collateral is, BB or high yield loans."
Finally, Rothweiler adds, "Credit for us is a much easier bet right now. I have an old saying, 'You can't model fraud, and you can't model politics,' right? That's just the reality of it. So, I feel like in a way, whether it's tariffs, fiscal policy, a lot of things up in the air, and you look at how [volatile] even the two years have been.... For us, from a duration standpoint, we're staying close to home. It's just a more difficult bet, and we'd rather spend our risk budget on credit versus duration. So how we play that right now is staying close to an index and limiting any kind of major bet either way. Because one headline, and it goes against you. So, we'd rather just stay out of it."
Late last week, we hosted our latest Crane's Bond Fund Symposium in Newport Beach, Calif. The keynote talk, "Ultra‐Short Bond Funds: Surf's Finally Up," featured J.P. Morgan Securities' Teresa Ho, PIMCO's Jerome Schneider and J.P. Morgan Asset Management's Dave Martucci. Ho explains, "What we're going to do ... is just give a high-level review of the short-term bond fund space from a performance perspective, flows, asset allocation. I'll ask Jerome and Dave to weigh in on some of these topics and for them to give a sense of some of the things that they're seeing and what they're thinking about, and after that I'll follow up with a brief comment on other ultra-short investors." (Note: Thanks again to those who supported BFS! Attendees and Crane Data subscribers may access the conference binder, Powerpoints and recordings via our "Bond Fund Symposium 2025 Download Center.")
She continues, "So just to set the scene ... 2024 was certainly a great year for ultra-short bond funds. They generated returns greater than 5% for all of 2024.... They outperformed the longer-duration strategies, and they also outperformed money market funds.... But with that being said, it certainly wasn't without its volatility.... So clearly, a lot of the flows movement is driven by returns -- performance does drive flows in this particular space. But through it all ... it was still a positive year for the short-term fixed income space. We're already seeing meaningful flows in January, and I think February is also going to be another positive month."
Ho says, "But what is really interesting is that while certainly we saw inflows into ultra-short and short-term bond funds, the flows into money funds were even more sustainable. In fact, as you can see on the slide, money funds saw pretty much record returns over the course of 2024. And this is a year that wasn't even marked by a crisis. The only other time that we saw more inflows into money market funds was 2020, that was COVID, and 2023, and that was the regional banking crisis."
She asks, "Is it still kind of an attractive space for people to be in, given the current environment that we're in right now?" Schneider responds, "Yes, it is an attractive environment. Context is important here, and we have to rationalize. One of the worst calls that has been made over the past 18 months has been the notion that all the money is moving from the money market fund $7.3 trillion to the equity market. Clearly [that's] not going to happen. But it's important to recognize a few things. One, the inertia of money market funds is huge, both from a safety perspective, i.e. looking to avoid volatility, as well as just the compounding effect of just earning, you know, 4% on an ongoing basis in terms of asset growth."
He comments, "Our job collectively at PIMCO's short-term team is to try to incentivize, and educate investors to the merits of being in that ultra-short space. It's basically proposing that you can have a high degree of quality portfolios, liquidity management over an intermediate horizon, and combine that to earn additional returns. There are a lot of folks who can appreciate that. That's where our combined businesses do really well. But there are even more people, clearly, who don't necessarily buy into that notion. That's always a challenge in terms of that educational process. But there will always be money in money market funds, and that's a good thing, because that's the foundational liquidity."
Schneider states, "But what we're finding ourselves in is a unique environment where that step out of cash, so to speak, is incredibly powerful, probably to the tune of hundreds of basis points or more at this point in time. So, from a practical point of view, yes, it makes sense to at least evaluate the ultra-short landscape and even short-term landscape, that one to three-year space in its totality as an opportunity set to earn additional premiums. And then the second thing is, we're beginning to see a more bifurcated landscape of those money market options."
He explains, "Timing is important, and not just from a duration call. We can go back to views of the market in a bit. But I think it's important to recognize that the 'T-bill and chill' era really had people lock up cash for three months, six months, a year, two years. Now all those maturities are coming due. People are engaging to have practical conversations about how to think about putting that money back to work. And it may not be in risk assets."
He adds, "The most exciting part about what has gone on in our universe is that growth of the ETF segment, since MINT was created as an actively managed strategy 15 years ago. It's taken a long time, accompanied by great products like JPST and the cohort of people in the ultra-short landscape. It's now a pretty diverse subset. So, people are finding their way in one way, shape, or form to that universe."
Martucci then tells us, "The great part of the ultra-short space throughout my career is there's always been a way to talk about it and spin it. I mean ... whether rates were at zero, it was like, 'You're going to sit at zero, and you can get 30 to 50 base points.' Then in 2022, in '21, rates were going up, and you had inflation. You're like, 'Okay, then we went after the long-term fixed income investors and say, oh, I want you to come down the curve.' We'll give you an opportunity to get a little more of the cash, and you don't have to take that interest rate risk. Now, we're again at that point where basically the Fed has acknowledged that their base case is that inflation is going up and growth is coming down. I think that leads to really a tailwind for all of our products in the front end."
He then says, "If you could build a portfolio that is out-yielding ... a money market fund, which you can now, and you also have the ability to capture some duration and not take too much risk out the curve, it really does seem to be a sweet spot for us, and we expect that to continue. But to echo Jerome's comment, that T-bill and chill mentality was definitely where a lot of our conversations on the institutional side are happening, where there's a lot of, you know, large institutions or family offices or what have you that were just rolling bills, and now all of a sudden, you know, the curve is inverted. So it's not necessarily the highest point along the curve."
Finally, Martucci tells us, "You can produce a competitive yield. You can show attractive returns over the past year from rolling that strategy. So I think that is where most of our discussions are, and then we are starting to see more retail-type investors. I think that's [driven by] the acceptance of the ETF, which has been great for us as a platform across the board in the ultra-short space as an investment tool for clients, and mostly that's been on the retail segment is where the ETFs has had the most success."
Federated Hermes' Deborah Cunningham writes on "The New Magnificent Seven" in her latest monthly commentary. Subtitled, "Total US money fund assets push past $7 trillion again," the piece states, "The growth of money market mutual funds since the Federal Reserve first hiked rates in 2022 has been something to behold. Not as thrilling as Akira Kurasawa's 'Seven Samurai' and John Sturges' beloved adaptation, 'The Magnificent Seven,' or as trendy as the Mag 7 tech behemoths. But with total US assets under management (AUM) again topping $7 trillion, just as spectacular." (Note: Thanks once more to those who supported our Bond Fund Symposium last week in Newport Beach! Watch for coverage in coming days and in our upcoming Money Fund Intelligence and Bond Fund Intelligence. Attendees and Crane Data subscribers may access the conference binder, Powerpoints and recordings via our "Bond Fund Symposium 2025 Download Center.")
Federated's Money Market CIO tells us, "According to the Investment Company Institute (ICI), AUM in US products passed that mark in March for the first time. We do not think this growth is substantially due to the recent up, then down again, trajectory of the stock market. The argument that investors are placing cash in liquidity products to weather the storm is belied by the nature of the flows."
She states, "In March, when you might expect most investors would have been concerned that the tariff-influenced stock market correction might become a crash, institutions pulled their money from the relative safety of money funds. Some expected these sophisticated and active clients to run for cover to liquidity, yet they did the opposite. Many who did pull assets seemed -- or actually revealed -- that they were motivated by other reasons, and some of that money is likely to eventually return."
Cunningham asks, "But didn't retail clients invest more in March? Yes, but at a growth rate consistent with the extensive migration to money funds seen over the last several quarters. We can't pinpoint from where those assets came. But the steady nature of the inflows supports the hypothesis that people are fed up with low interest rates of other products."
She adds, "It's not just US money funds. To our knowledge, assets in many non-money fund (rule 2a-7) products, such as investment pools and private funds, have risen; and the ICI reports that total global money fund AUM have also reached record highs. Cue the famous heroic 'Magnificent Seven' theme."
In other news, with now less than 3 months to go until Crane's Money Fund Symposium, which will be held in Boston, June 23-25, we are also starting preparations for our 11th Annual European Money Fund Symposium. The preliminary agenda has been released and registrations are now being taken for this year's European event, which will take place Sept. 25-26 at the Hilton Dublin in Dublin, Ireland. We provide more details on both shows below, and feel free to contact us for more information.
Our 2024 European Symposium event in London attracted a record 210 money fund professionals, sponsors and speakers. Given higher for longer rates and the potential for another round of regulatory changes in Europe, we expect our show in Dublin to again be the largest gathering of money market professionals outside the U.S. "European Money Fund Symposium offers European, global and 'offshore' money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, and an excellent and informal networking venue," says Crane Data President Peter Crane. "Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals," he adds.
Registration for European Money Fund Symposium is $1,000 USD. EMFS will be held at the Hilton Dublin. Hotel rooms must be booked before August 21 to receive our discounted rate of E269. Visit www.craneeurosymposium.com to register, and contact us to request the PDF brochure. (Let us know too if you'd like information on speaking or sponsorships.)
Also, with less than three months to go, Crane Data is ramping up preparations for our `big show, Money Fund Symposium, which is June 23-25 at The Renaissance Boston Seaport. The latest agenda is out and registrations are now being taken.
Money Fund Symposium attracts money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators. Visit the Money Fund Symposium website for more information. Registration is $1,000, and discounted hotel reservations are available. (E-mail us at info@cranedata.com to request the full brochure.)
Finally, mark your calendars for our next Money Fund University "basic training" event, scheduled for Dec. 18-19, 2025, in Pittsburgh, Pa, and for next year's Bond Fund Symposium, which will be March 27-28, 2025 in Boston, Mass. Let us know if you'd like more details on any of our events, and we hope to see you in Boston in June, in Dublin in September or in Pittsburgh in December!"
