Smooth Sailing is No Excuse for Complacency

The great paradox of 2017 was the relative calm in short-term debt markets in the face of unprecedented turbulence in the daily news cycle. Our new President’s unconventional communication style did not lead to the financial market volatility many had predicted. And despite ongoing partisan political turmoil, multiple terror incidents, an uncertain start to Brexit, economic slowdown in China, emergent asset bubbles, and rising corporate leverage, Treasury issuances were well received, and market liquidity held up well. Meanwhile, the Dow, S&P and NASDAQ all hit new market-index highs.

With global growth hitting on all cylinders in early 2018, institutional cash investors might be tempted to put their portfolios on autopilot and enjoy a few months of smooth sailing. In fact, this month’s Capital Advisors Group research report acknowledges that, by many measures, 2017 was a “blissful” year. But it also takes a clear-eyed look at potential risks corporate cash managers will face in 2018 and provides practical advice on how to position cash portfolios for continued success even if there are unexpected bumps in the road.

As in the past, our January report outlines three issues that could have significant impacts on short-term debt markets in the year ahead. First, the tax reform legislation passed in December 2017 will kick in quickly and touch every corner of the economy and debt markets in 2018. Among other things, tax-cut-driven deficits may require the Fed to issue more paper, which might push yields higher as the market absorbs more supply.

Second, central banks worldwide will continue unwinding trillions of dollars in asset purchases made in their quantitative easing programs instituted to combat the great recession. Along with interest-rate increases by the Fed, the balance-sheet reductions might put greater upwards pressure on long-term rates, leading to potential portfolio losses further up on the yield curve.

Finally, and perhaps most importantly, our report identifies “event risk” as the main X-factor that all investors should be concerned about as they plan their 2018 cash portfolio strategies. Conflict on the Korean peninsula, Congressional gridlock leading to a government shutdown or debt ceiling crisis, bursting of the cryptocurrency bubble, major domestic or international terrorism incidents, a cyber-attack on a financial nerve center, or any number of other potential events could send shockwaves through the markets.

For detailed insights on how to position your portfolio for these possible impacts, download Central Bank Tightening, Tax Reform and Event Risk: Three Trends to Watch in 2018. It’s fine to enjoy the current run of stable markets and positive economic performance; but at the same time, keep in mind that when it comes to cash investing, smooth sailing is never an acceptable excuse for complacency.

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Best Regards,

Ben Campbell
CEO