Knowledge. Shared Blog

October 2019

Quest for Yield Means Making Cash Work Harder

With interest rates continuing to fall, investors are finding it harder to generate positive yield at the low end of the risk spectrum. Portfolio Manager Dan Siluk explains why it’s important for short-duration bond portfolios to consider opportunities outside the U.S. in this environment.

Key Takeaways

  • As central banks continue to lower rates amid economic uncertainty, investors are finding it more and more challenging to generate yield at the low end of the risk spectrum.
  • In this environment, we think it’s necessary for investors to make their cash work harder, as money market funds and bank CDs no longer offer the yields they are seeking.
  • In our view, short-duration bond portfolios should seek opportunities not only in the U.S. but also in global regions where positive real yields can still be found.

View Transcript

Dan Siluk: More recently, with the lower rate profile that we are seeing, is the real rate that you are earning on your CD and money market portfolio is no longer as attractive as it was at the beginning of 2018. So a positive real yield is something that’s going to be a little bit more difficult to achieve at that low risk end of the spectrum in your money market portfolio. So it is a really important time to make your cash work harder for you today.

So, in today’s environment of falling rates, it is easy to lean on a core or a longer-duration product in order to earn some return. However, the risk profile is quite asymmetric. So with duration being extended over the crisis years during QE and during the low rate environment, debt levels have swelled, which means the duration of your standard core-type benchmarks has increased, yet your yield is quite low. So you only need a short, sharp rise in rates to completely wipe out any potential capital gains that you receive from falling rates.

So in shorter-duration bonds, particularly when yield curves are flat to even negatively-sloped in some cases, the front end of the U.S. curve is inverted, implementing a short bond portfolio means being global. So it is not just focusing on U.S. markets, where I mentioned there are some attractive opportunities, but there are also opportunities abroad. So within Asia ex-Japan, within Australia, there are other environments where there are positive slope yield curves and positive real yields.

We are in an environment where the economic outlook is quite uncertain. Whether you look at geopolitical risks, such as Brexit, uncertainties as to how that unravels, or even closer to home, the U.S.-China trade wars as well, [that] certainly has an impact on consumer confidence, business confidence, the willingness of people to invest. And central banks globally and here in the U.S., with the Fed, they are looking to mitigate some of those risks by lowering the interest rate profile. So we expect a few more cuts in the coming nine- to 12-month period, to come not just from the Fed, but from other central banks globally, as they contend with some of these uncertainties.

 

Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.

An investment in a CD or other bank product may be insured or guaranteed, an investment in securities is not. Investing involves market risk. Investment return and value will fluctuate and it is possible to lose money by investing.

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