Squeezing the Turnip

Nothin’ from nothin’ leaves nothin’
You gotta have somethin’
If you wanna be with me
-Billy Preston

The nothin’ offered in the money market fund world has driven investors to seek other ways to add return. One easy way is to simply pay close attention when deploying funds into the marketplace.

Thinking back over the last 14 months since the last interest rate cut, we can recall several times the argument being made that the Fed needs to take some of the slack out of their efforts by boosting interest rates. Indeed, there are many out there who fear inflation to the point of arguing the Fed needs to lift rates now.

Like most points of view on such slippery topics as economics, this viewpoint has had its 15 minutes — several times, actually.

But the Fed itself has come out several times saying they will keep rates low for an “extended period.” With the outlook set at stable interest rates, investing appropriately turns to focusing on market volatility and attempting not to buy at low yields, while focusing purchases when interest rates rise unnecessarily.

We’ve seen this occur now three times in the last nine months and we’ve developed strategies to take advantage of these opportunities for both our clients who allow active trading and those who do not.

For clients allowing us to actively trade, we have moved in and out of Treasuries, capturing the gains this volatility has offered. These clients understand that if yields continue to rise after we’ve made a purchase, we can always hold the securities to maturity and accrue interest well north of their money fund option.

For clients who do not allow active trading, we have attempted to make our purchases when the market was offering higher yields. Of course, we are not realizing gains for these clients by selling when yields drop, but at the end of the day making our purchases at higher yields has offset the waiting period from funds availability until purchase. This is due to the fact these opportunities have presented themselves fairly regularly over this period.

Will this be the case going forward? I think so.

The government — meaning Congress, the Administration, the Fed, the FDIC and Fannie/Freddie — continue to send mixed signals and continue to change the rules of the game as we go.

The uncertainty this creates is translated quickly into volatility in the bond markets which we are capturing for our clients.

While there is really nothing new about the volatility offered in the marketplace, it is much more important these days as the ability to add such significant, additional yield over money funds while taking on no credit risk — is taking center stage vs. other typical investment strategies for cash managers.

For more information on active trading strategies, please Creating Value with Active Cash Management.

Key Developments
The Bank of England ended its quantitative easing program even as the Fed nears its internally-set limits for purchases of Treasuries and mortgages. The high demand for Treasuries, exhibited by the latest flight-to-quality trade out of Europe’s problems, may argue for the Fed to step aside. However, given we are a far cry from a functioning mortgage market, the Fed may wish to extend this program beyond the current March deadline.

Financial Services Committee Chairman Barney Frank announced last week his intention to hold a hearing on March 2 to finally begin the process of considering the future of housing finance. I am hopeful this will kick off a long and significant debate on how to structure this critical part of our economy.

The unemployment rate dropped to 9.7 percent as the economy lost another 20,000 jobs in January. The work week moved up slightly and signs that temporary jobs are in demand could signify the jobs market is poising itself for recovery. However, it seems more likely we are just seeing confirmation of a stagnant jobs market awaiting the return of the consumer to help drive growth going forward.


The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.


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