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November 4, 2022  |  5 Minute Read



Following the European Central Bank’s (ECB) three rate hikes so far this year, and with current pricing for further hikes in the coming months, Money Market Fund (MMF) yields have risen significantly above zero and can compare favourably to alternative options such as overnight deposits. Of the two main liquidity products used by investors, bank deposit rates are often slower than MMFs to pass on higher yields following rate hikes, so there may be a benefit to cash investors to check their overnight call or current account rates with their banks and compare these to AAA-rated1 MMF net yields.   


Market Moves

At the start of the year, the market was pricing very little expectation that the ECB would raise rates in 2022. Since then, the market pricing for rate hikes has increased significantly as inflation moved higher than the ECB's target of 2%. At its monetary policy meeting in July, the ECB took its key interest rates to zero (from -50bps) for the first time since 2012, before shifting to a 75bps pace for further hikes in September and October, taking the policy rate to 150bps today.


Looking ahead, the market believes the ECB will increase the deposit rate by an additional ~64bps at the final meeting of the year in December, reflecting a split opinion over a possible shift to a slower hike cadence of 50bps vs. another 75bps hike. The market currently expects hikes to continue into next year, with the deposit rate reaching a high of ~3% by Q3 2023.



Exhibit 1: ECB Deposit Rate Expectations


Source: Bloomberg, Goldman Sachs Asset Management. As of October 28, 2022.


The Excess Liquidity Effect

Since the 2008 global financial crisis, Eurozone excess liquidity (liquidity held by banks above the minimum reserve requirements) increased significantly due to the ECB offering banks attractively priced loans through Targeted Longer-Term Refinancing Operations (TLTROs), and from the ECB buying bonds as part of Quantitative Easing. Excess liquidity reached a high this month of €4.8trn, up from €2.9trn two years ago. As a result of the increase in excess liquidity, there has been pressure on front-end instrument yields, keeping them low. This pressure builds up particularly on “statement dates” such as quarter and year-ends, and despite rates being positive, interest rates for overnight repurchase agreements are expected to meaningfully decrease around year-end, a dynamic caused by a lack of collateral in the market as demand outstrips supply. 


In their October meeting, the ECB announced changes to the TLTRO program which incentivises banks to repay faster than previously anticipated. The effect of this on excess liquidity and collateral is still to be determined, but at the margin could reduce some pressures.



Exhibit 2: Excess Liquidity in the Eurozone Since 2020


Source: Bloomberg, Goldman Sachs Asset Management. As of October 28, 2022.


As a result, we believe that EUR-denominated money market funds may be well positioned to provide cash investors with an attractive alternative to deposits, repurchase agreements2 and other alternative investments in the coming months.    


The Cash Investing ‘Trilemma’

As cash investors balance the desire for principal stability, liquidity and yield, it is important to remember that the market typically only allows for two of these goals to be achieved at one time, often at the expense of the third.  



Exhibit 3: Features of MMFs and Bank Deposits


Source: Goldman Sachs Asset Management.




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1 Credit rating agencies Standard & Poors, Moodys and Fitch have Money Market Fund ratings.

2 Lending cash on a short term basis in exchange on a secured basis. This tool may be attractive for investors who wish to lend cash to counterparties under specific terms – collateral, rates and term must all be agreed.


Hawkish is a term used to describe the expectation for less accommodative monetary policy. 


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Date of First Use: November 4, 2022. 295965-OTU-1696071.

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