Why the flood of corporate short-term investments out of prime money funds was borderline irrational—and what corporate treasury teams can learn from it.
Although markets have now returned to a relatively normal state, movement in money funds bordered on irrational in March of this year. As the impacts of the Covid-19 pandemic began to sink in, volatility reached the highest levels in decades and markets went “risk off.” Corporate treasurers drew down credit lines and poured cash into the seemingly safest alternatives—government and Treasury money-market funds (MMFs).
Here’s how the situation unfolded: Following its federal funds rate cuts of 50 basis points (bps) on March 3 and 100 bps on March 16, the U.S. Federal Reserve took additional actions to bring confidence to volatile markets, bolstering liquidity with backstops for commercial paper and money-market funds.
Source: Treasury & Risk