Institutional investors are reassessing how they manage liquidity, with public debt money market funds emerging as a potential tool for prioritising capital preservation and access to cash, according to BNP Paribas Asset Management.
Institutional cash management is shifting from operational efficiency to strategy as investors navigate changing monetary policy, counterparty risk and regulation, said Thibault Malin, deputy head of the global money markets team at BNP Paribas Asset Management.
Public debt constant net asset value (CNAV) money market funds, which invest mainly in sovereign, supranational and agency securities, are being highlighted as an option for institutions, particularly European investors, seeking lower credit risk and high daily liquidity. These funds invest almost all of their assets in high-quality government, agency and supranational securities, maintain a stable net asset value and avoid exposure to financial institutions and corporate issuers, according to the asset manager’s investment outlook.
“CNAV money market funds offer a compelling opportunity in today’s environment by combining maximum stability, competitive short‑term yields and high daily liquidity,” said Malin.
Compared to bank deposits, CNAV funds can diversify counterparty risk while providing daily access to liquidity. Relative to direct Treasury bill holdings, they offer operational efficiency and active management of rate, credit and liquidity risks.
Unlike low volatility net asset value and variable net asset value money market funds, public debt CNAV strategies avoid exposure to financial and other private sector issuers, allowing them to be used as both core and tactical allocations.
BNP Paribas Asset Management said such funds combine liquidity with a conservative risk profile and can be used by investors managing short-term cash while maintaining liquidity.
The approach can be helpful during periods of market stress. High liquidity buffers, short maturities and stress testing are designed to ensure that investor redemptions can be met without compromising portfolio integrity. For institutions that view cash as a risk-management tool rather than a return-seeking asset, this approach is critical, said Malin.
Rising interest rates have made liquidity assets economically meaningful again, he added, bringing focus to structure, transparency and risk controls.
Public debt CNAV funds usually maintain high levels of daily and weekly liquidity and invest in high-quality liquid assets, aligning with the needs of banks, insurers and corporates managing operational cash.
Corporate treasurers may use public debt CNAV funds for day-to-day liquidity while diversifying away from bank deposits, while insurers may use them as a conservative liquidity sleeve aligned with governance requirements, high credit quality and predictable liquidity.
Public debt CNAV funds should be assessed not only on asset composition but also on risk management, governance and operational infrastructure, said the firm. Investors should look for clear disclosure of liquidity buffers, stress testing and escalation procedures, along with consistent reporting and experienced portfolio oversight, with manager discipline as important as the structure itself.
