A Slower and Shallower Path for Cash Investors

When the Fed increased interest rates for the first time in nearly a decade last December, many cash investors expected multiple additional increases to follow this year. But since early January, capital market participants have been on a rollercoaster ride, buffeted by China’s stock-market meltdown, by collapsing commodity prices, and by other central banks around the world easing rates rather than tightening. The result has been no action by the Fed in its past two meetings, with markets expecting far less tightening through the rest of 2016 than originally expected.

So, if you were hoping for a steady climb back to the level of returns that you enjoyed before enduring the lengthy zero-interest rate environment, the past four months will likely have been a big disappointment. This month’s research report on A Slower and Shallower Path for the Fed Funds Rate explains what has occurred since December and why the Fed remains on the sideline. More importantly, it also points the way to a path forward for those seeking higher returns than they may be able to find with Treasuries or prime money funds, even with a slower ramp-up in rates this year.

In fact, the new lower expectations regarding rates, while disappointing for many who crave a faster end to the yield-starved short-term rate environment, may actually bode well for liquidity investors who invest directly in high quality assets through separately managed accounts. Fewer rate hikes in the medium-term may mean that longer weighted average maturities in portfolios of carefully selected investments could address many cash investors’ requirements for liquidity, safety of principal and yield in 2016. Together with last month’s research report on Optimizing Separate Account WAM in a Rising Rate Environment, this month’s report provides a helpful guide to cash investors navigating the slower and shallower path toward higher rates.

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Best Regards,

Ben Campbell
President & CEO