GBP47bn money market fund sector "at risk from negative rates", says AXA IM’s Trindade

Negative performance

The GBP47 billion money market fund sector in the UK is “at risk” from negative interest rates, according to AXA Investment Managers’ Nicolas Trindade.

Money market funds allow investors to earn a small amount of interest while having ready access to their cash. But the pandemic and subsequent moves by central banks to support economies has forced yields on some government bonds into negative territory, reducing the yield money market funds offer.

The sector saw outflows of GBP1.7 billion across the summer amid talk from the Bank of England that they were “actively considering” introducing negative rates to help support the UK’s flagging economy.
Amidst this backdrop, Trindade, manager of the AXA Sterling Credit Short Duration Bond fund, believes it may be time for investors to consider other options.
“We have seen interest rates and government yields plummeting this year, and that has led to ever lower money market rates,” Trindade says.
“There is a real risk the UK goes further and does opt to introduce negative rates, and for money market funds that would be a clear negative.”
One-month Libor rates - on which many money-market funds are priced - are currently around 0.14 per cent, having fallen sharply this year. Trindade says the case for holding short duration assets rather than money market funds had therefore strengthened.
He noted the yields available from short duration assets are significantly higher than the near zero rate money market funds are paying.
“All yields have fallen, but short duration bonds are still attractive, particularly for cash investors who are looking for products exhibiting lower volatility and drawdowns, and can commit to holding money in these bonds for a slightly longer time period,” he says.
Trindade’s AXA Sterling Credit Short Duration Bond fund yields around 1.1 per cent currently, while his global Short Duration fund has a yield around 2.0 per cent.
Trindade added that by using different types of credit within the funds, the strategies can exploit opportunities across the credit spectrum to maximise yield.
“After the significant spread compression we have seen since late March, we believe 2021 will be all about income return, and we have been adding to high yield and emerging market bonds to generate extra returns,” he says.
“We’ve more than doubled our exposure since February, taking it to 40 per cent now in the global fund, as we think we do get a return to a more normalised environment globally next year. Emerging market debt in particular will benefit from that, and from continued dollar weakness and low US treasury yields which we also expect.”