INTERVIEW with Salim Khalifa, manager of CM-AM Institutional Short Term and CM-AM Short Term Bonds
Crédit Mutuel Asset Management
Since the crisis of spring 2020, the ECB has injected, via the PEPP and TLTRO III, considerable amounts of liquidity into the market. In the short term, this has solved a problem by restarting transactions in a money market that was seized up. In the medium term, however, it caused a significant drop in yields on money market investments and a scarcity of short issues for investors. Issuers preferred to secure their financing needs on longer maturities, thus abandoning the money market segment somewhat.
Part of the proceeds of these refinancing operations enabled the private sector to increase its cash holdings - probably temporarily - and to invest some of it in investment funds. French money market funds have grown by about €100 billion since the crisis, while the amount of issues has fallen significantly. The consequences are obvious: for funds, yields often lower than the ECB deposit rate (-0.50%) and concomitantly, dissuasive levels for bank term deposits.
The higher returns of short bond funds relative to money market funds are mainly due to two performance drivers.
First, the lengthening of average investment maturities. This method makes it possible to exploit the premium offered by generally positive credit slopes. For example, CM-AM Institutional Short Term will invest in 2-3 year maturities not eligible for money market funds. The fund has posted a performance of -0.07% since the beginning of the year. The very strong growth of its assets (€850m, +100% in 1 year) confirms this trend of investors looking for yield.
Secondly, a less traditional way of investing in short products is to create a High Yield pocket with a very low average maturity. This is the case of CM-AM Short Term Bonds, whose objective is to resist negative rates. Rather than seeking better performance by simply lengthening maturities, this fund will also capture the relatively large premium of High Yield commercial paper. Indeed, to have access to the money market, these issuers must generally pay a premium higher than the intrinsic risk embedded in their signature.
Projections suggest that money market fund performance will remain stable at around -0.50 until the end of the year. With an estimated yield spread of 0.40% in favor of very short bond funds, the latter are becoming a credible complement for all investors who can both extend the duration of their investments (>6 months) and tolerate significantly higher performance volatility.
Completed on 10/09/2021