Thursday, May 19, 2022

Fast cash investments are needed to take advantage of the Fed’s tightening

Must Read

Fyre Festival founder Billy McFarland gets early release from prison

Fyre Festival founder Billy McFarland has been released early from prison. McFarland was serving a six-year sentence after pleading...

Yankees’ Luis Gil exits Triple-A start with likely elbow injury

BALTIMORE - The Yankees' pitching depth may have taken a hit on Wednesday, as right-hander Luis Gil left...

Kid Line a big Rangers’ silver lining in loss to Hurricanes

The Kids were perhaps the best Rangers on the ice on Wednesday, a little more than all right,...


() – For companies and other money market investors looking to raise revenue from almost zero, opportunities should emerge as the Federal Reserve begins to address the emergency stimulus during the pandemic this year.

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue in Washington, DC, USA, March 19, 2019. / Lea Millis / File photo

But the additional opportunity to raise short-term rates and increase public debt issuance will require additional effort and a prudent strategy if it is to bring the best benefits.

Very short-term investors have approached the Fed’s reverse repurchase facility at a record rate, with the Fed receiving cash and lending short-term securities to earn 5 base points overnight as cash flows increases and investment opportunities decrease.

As prices rise, more supply enters the market and cash flows decrease, which means investors can now use their money better. On Friday, investors paid $ 1.60 trillion at the Fed’s reverse repo facility.

“With a simple cash cut, money market funds can’t use much for a reverse repo object,” said Scott Skyrm, executive vice president of fixed earnings and repo at Curvature Securities.

The Fed is preparing to raise interest rates as early as March, with three or four increases expected this year, boosting yields on very short-term bills that remain close to historically low levels.

Jerome Schneider, head of PIMCO’s short-term portfolio management and financing division, said: “The concept of raising interest rates is a definite relief for cash investors who have been struggling with near-zero returns for at least two years,” said Jerome Schneider. .

The Treasury is also expected to accelerate the issuance of Treasury bills after it cut it last year due to debt caps, and the offer could grow if the U.S. Federal Reserve starts reducing its large balance sheet later this year. If the Fed stops reinvesting in overdue bonds, the Treasury is expected to increase short-term issues sold to the public to at least cover the temporary difference.

DON’T JUMP VERY QUICKLY

Investors should be wary of buying too quickly before rates rise. Many short-term assets do not reflect the expected rate increase until they occur.

Jeffrey Weaver, senior portfolio manager at Allspring Global Investments and head of municipal, short-term fixed income and money market groups, said the beneficial strategy is to keep most investments short-term after each rise and then keep the rate down. ‘llash thinks. in

“We don’t want to make significant purchases after March, which means we’re expecting the first rate hike. We will take full advantage of the rate increase in the short term, ”he said.

Alternatively, if the market seems to be moving forward on its own, this is a good time to invest in a loan that has growth rates such as debt that will be repaid in a year or two. ‘can be.

“If the market starts to raise prices more than we expected, we will use that to buy longer stocks,” Weaver added.

PIMCO Schneider points out that investors may want to be more proactive and adopt strategies that cover a variety of short-term assets to generate revenue. This could include selling their strategies across various short-term assets instead of investing in fixed assets that may face new regulatory constraints.

“We see this as a more constructive period for cash investors in 2020 and mainly in 2021, when earnings were close to zero, but at the same time being active and dynamic and yet patient. there is a possibility. they are thinking about how to manage liquidity, ”he said.

This is especially true as inflation continues to reduce the real return on fixed assets, with the Fed expecting yields to remain low even if it lowers inflation to its long-term target of 2%.

The Fed’s recent tightening period from 2015 to 2019 ended with major financing stresses as the Fed lowered its balance sheet and increased demand for overnight loans from companies, banks and other borrowers.

Since the Fed set a permanent stop to the market last year in the form of the Permanent Repo Facility, this time the recurrence of such a cash shortage is less likely. However, any increase in demand for this object could be a warning signal.

According to Jefferies money market economist Tom Simons, the increase in use of the facility “indicates to the Fed that they need to slow down or stop reducing their balance sheet size.”

How quickly the Fed’s balance sheet declines and investors ’confidence in the reverse repo system will likely depend on how well the economy withstands monetary tightening.

Karen Brettell’s interview; Additional report by Gertrude Chaves-Dreyfus in New York; Edited by Alden Bentley and Andrea Ricci

.

- Advertisement -
Latest News

Fyre Festival founder Billy McFarland gets early release from prison

Fyre Festival founder Billy McFarland has been released early from prison. McFarland was serving a six-year sentence after pleading...

Yankees’ Luis Gil exits Triple-A start with likely elbow injury

BALTIMORE - The Yankees' pitching depth may have taken a hit on Wednesday, as right-hander Luis Gil left his start for Triple-A Scranton...

Kid Line a big Rangers’ silver lining in loss to Hurricanes

The Kids were perhaps the best Rangers on the ice on Wednesday, a little more than all right, and yes that was a...

Sky Ferreira announces new song ‘Don’t Forget’ is arriving next week

Sky Ferreira has announced that a new song titled 'Don't Forget' will arrive next week. The release date was confirmed by the singer-songwriter's label,...

Francisco Lindor plunking sparks Mets’ fifth-inning rally

The fans at Citi Field booed loudly in the fifth inning, when Francisco Lindor became the third Met to be hit by a...
- Advertisement -

More Articles Like This