Three Challenges in 2014

Abstract

We elaborate on three key challenges for corporate cash investors in 2014: the emergence of new financial regulations, anticipation of a steeper yield curve, and proliferation of innovative products.
As a number of financial regulations reach the stage of implementation, short-duration investors will start to feel the impact of regulatory initiatives. Even though higher interest rates may not be on the immediate radar screen, we caution our readers regarding the possibility of a volatile front-end yield curve adjustment and we advise our readers to assess long-duration strategies in their cash portfolios. As scarcity continues among traditional cash instruments, we may see more innovative products such as collateralized commercial paper and putable corporate notes emerge to satisfy investors’ thirst for yield and issuers’ regulatory obligations.

Introduction

In our first newsletter of the year, we typically condense our trend outlook for the New Year for corporate cash investors into three major challenges. We find this exercise to be helpful in planning for what lies ahead, but this year’s task proved to be unusually difficult because a long list of challenges from prior years remain unresolved and because the investment climate may shift direction in the upcoming year.
Recognizing our readers’ probable fatigue with year-end outlook literature, we try to avoid ubiquitous subjects such as supply constraints, low yields, and “taper” speculation on the Federal Reserve’s asset purchase program. Instead, we group related subjects into three main themes: the emergence of new financial regulations; the anticipation of a steeper yield curve; and the resurgence of innovative instruments. And while some challenges from 2013 will likely linger, we think the New Year may offer the beginning of a new, and more interesting, investment environment for our fellow investors.
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