An improving growth picture gives fodder to the Fed to increase rates this year – possibly several times. It should also be a signal for capital preservation and liquidity investors.
Investors should take note of the low absolute yields which many “cash equivalent” assets offer, in both absolute and relative terms.
Now that we have clarity on the U.S. election and seem to be on the precipice of a Fed hike, it is time to refresh the rules for investing for capital preservation.
An investment in money market funds since the beginning of 2009 would have decreased purchasing power by more than 14% on a cumulative basis.
The Brexit vote caught many investors flat-footed but central bankers charged with liquidity management merely lifted an eyebrow.
PIMCO managing directors discuss the December Fed announcement of a 25 basis point hike in the federal funds rate, the outlook for the Fed in the coming year and the implications for investors.
While many are focused on whether U.S. federal spending hits the debt ceiling before a deal is reached to increase it, that scenario is only part of the story in the U.S. Treasury bill market.
Until now, traditional cash management strategies – investing cash via money market funds, directly buying U.S. Treasury bills or placing monies on deposit with banks – have mostly succeeded in preserving capital. But they may have failed to preserve purchasing power.
As a result of increased demand, short-term government assets ‒ and the strategies that invest in them, namely 2a-7 money market funds ‒ will likely continue to offer little compensation (yield) to investors even as the Fed starts to recalibrate rates higher.
In the current environment, investors – particularly those in the U.S. – must consider that there may be obstacles in managing excess cash efficiently.