By Andrew Green, Staff ReporterMONEY MARKET companies are only now recovering from the impact of the special five-month Bank of Jamaica (BoJ) money market instrument introduced last week.
The BoJ last Friday withdrew the 30 per cent open market instrument which it had introduced on Monday, February 10. But during its one week on the market, the instrument created a serious problem for the financial intermediaries in the sector.
"The average earnings of most portfolio managers are nowhere near 30 per cent, so their net interest position would have been negative," said Paul Gray, Jamaica Money Market Brokers fixed income trader. He said, "Effectively it means they would have been making losses."
How banks like Manufacturers Sigma Merchant Bank function in the money market is by matching assets with liabilities, said Henry Pratt, its vice president for corporate banking and investment services. But based on pre-existing market conditions, he said the assets held by institutions were earning "in the high teens."
"Your portfolio was earnings probably 18 per cent to 19 per cent and you were paying out 30 per cent," Mr. Gray said. "You can see the negative carry-over."
The five month instrument served to push up short-term interest rates across the spectrum of instruments running from 30 days to 150 days. Mr. Gray said, "all funds got expensive during this period."
The instrument increased the cost of funds to money market players, said Charles Ross, chief executive of Sterling Asset Management Limited. "It put them under a fair amount of liquidity pressure as well."
"Clients in existing instruments which had a lower yield would have wanted to sell those instruments and get into the higher yielding investments," Mr. Ross said.
Institutions have a problem, "if
you have a contract with a person for 30,60 or 90 days and you have a matching asset, then 10 days later the person wants to come out of this investment," Mr. Pratt said. "Your difficulty as an institution is that you have to find replacement funds because you have an asset that you still need to fund."
If the client no longer wants to maintain his contract, "you have to go into the market and try to find money," Mr. Pratt said. "But money is out there at 30 per cent."
To cover their position, some institutions increased their encashment charge Mr. Pratt said. That charge was intended to compensate the firm for securing covering funds in the market.
Unless their investment was close to maturity, this made it too expensive for many to carry out an early encashment, Mr. Pratt said.
"Fortunately the instrument was not there for very long," said Mr. Ross. "It would certainly have been disruptive."
For this week, liquidity flowing into the market should amount to just a little over $1.4 billion, Mr. Gray said. "But it is not significant enough to ease the tightness that occurred last week."
Rates on 30-day instruments Friday fell to a band of 18.5 to 20 per cent of Friday, Mr. Gray said. But industry players realised there was not enough liquidity in the market, so the 30-day rates rose today to about 28 per cent yesterday.
"As the week progresses, it may ease somewhat," Mr. Gray said. As more liquidity flows into the market next week, rates on 30-day instruments could drop back to 18.5 if there is no new instrument to mop up this liquidity.
...after central bank pulls high-yield security
you have a contract with a person for 30, 60 or 90 days and you have a matching asset, then 10 days later the person wants to come out of this investment," Mr. Pratt said. "Your difficulty as an institution is that you have to find replacement funds because you have an asset that you still need to fund."
If the client no longer wants to maintain his contract, "you have to go into the market and try to find money," Mr. Pratt said. "But money is out there at 30 per cent."
To cover their position, some institutions increased their encashment charge Mr. Pratt said. That charge was intended to compensate the firm for securing covering funds in the market.
Unless their investment was close to maturity, this made it too expensive for many to carry out an early encashment, Mr. Pratt said.
"Fortunately the instrument was not there for very long," said Mr. Ross. "It would certainly have been disruptive."
For this week, liquidity flowing into the market should amount to just a little over $1.4 billion, Mr. Gray said. "But it is not significant enough to ease the tightness that occurred last week."
Rates for 30-day instruments on Friday fell to a band of 18.5 to 20 per cent, Mr. Gray said. But industry players realised there was not enough liquidity in the market, so the 30-day rates rose today to about 28 per cent
yesterday.
"As the week progresses, it may ease somewhat," Mr. Gray said. As more liquidity flows into the market next week, rates on 30-day instruments could drop back to 18.5 per cent. But he said this would only occur if there is no new instrument to mop up this liquidity.
