Economic and Market Commentary

From Cash to Cash Flow in Short-Term Bonds

02/10/2023

Jerome Schneider

Discover how active management in short-term bonds may help investors earn premium returns over cash for a modest increase in risk, while maintaining diversification and resilience in the face of economic downturns.

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Schneider: The Federal Reserve's rate hiking cycle has led investors to benefit within the fixed income universe.

Often time, high quality portfolios can produce yield on income of about 6.5%.

Text on screen: Jerome Schneider, Head of Short-Term Portfolio Management

We believe that there's an opportunity for active portfolio management within the front end of the yield curve. Specifically looking at high quality securitized products, self-liquidating assets and assets which benefit from not necessarily betting on interest rate exposure in the near term.

At this point in time, it does three distinct things:

Text on screen: 1. Earn higher premiums

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One, being in fixed income and specifically at the front end of the yield curve allows investors to focus on higher cash yields, earn additional income in the face of uncertainty and economic prospects that are not necessarily known outcomes.

Text on screen: 2. Minimize exposure and risk

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Number two, if interest rates should increase, it allows you to be a little more defensive in terms of anticipating those rate increases and more importantly, shielding portfolios from market volatility that might exist from further rate increases

Text on screen: 3. Leverage liquidity to benefit from capital appreciation,

Images on screen: The Federal Reserve, Stock market ticker

and number three, should rates actually decrease as economic outlooks become more clouded, you'll actually benefit by being able to reposition in portfolios and extend duration or interest rate exposure to take advantage of an economic outlook, which suggests that rates are going to be moving lower over the longer term.

These three things allow maximum optionality for investors to manage higher than expected cash balances, more importantly prove to be active in terms of how they're thinking about those cash balances on the sidelines and then earn above market premiums.

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Moving out of high quality cash T-bills and money markets is the first step to this analysis and

We view this as being not only an opportunity set right now, but for the immediate future, until we get more clarity on the economic outlook as well as the Federal Reserve’s resolve to fight inflation as we enter 2024.

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Disclosure

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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