Lower for longer

Persistent negative interest rates (in EUR) force asset managers to reinvent their business model to focus on a "more dynamic" cash management model to avoid value destruction that a (too) prudent short-term placement would imply. Taking an assured dry loss or preferring an investment with relative positive returns and limited volatility is a real strategic choice to consider. It is not simple or neutral and difficult to sell to an Audit Committee or CFO. Beyond standing idly by...


It's just a catchphrase...

This could be the title or chorus of a pop song from the charts. A heady chorus and a rhyme, a refrain repeated to excess ... Yet we must get used to this risk and the idea that rates are not ready to rise immediately and even if they go up again, they would do so smoothly and at a pachyderm pace. So, we need to demonstrate patience, who is the mother of virtues, but not the one cultivated by the treasurers... How to do better or his/her best with sub-zero rates? This is the impossible equation that we are being offered. The Japanese have known this for well over 20 years. The ZIRP or "Zero Interest Rate Policies" have shown their limits. The ECB went even lower than the ground floor in terms of interest rates. What would be the reasons to believe in rising rates as populations age, the economy is still slowing down, the cost of living is already very expensive, and States are over-indebted.



This is indeed a Cornelius dilemma to be solved. How can inflation be avoided while boosting the economy and employment? Central banks are desperately trying to stimulate their economies without really getting there and after using an incredible and unprecedented fighting arsenal. The policies of NIRP and ZIRP have shown their limits, I fear. An instrument that is supposed to be temporary, such as quantitative easing (i.e. QE), becomes permanent. It is the central banking world that is upside down. I don't think we should expect much from that side. So, what do we do?

The challenge of corporate investors "long" in cash

Corporates face a huge challenge: how can we explain that managing prudently excess liquidities destroys value? They desperately hunt for value and yield without getting there. Worse, they lose money by doing "well" (at least they believe they do well). So, what could we do to change this? Putting a little more risk in your wallet? Increasing durations? Lowering credit rating limits of our counterparties? Some have already invested in long-term

bonds and Govies. However, with a good counterparty risk the return is hardly better, and even often, still negative with, as a bonus on top, an intermediate volatility for those who report in IFRS (because of quarterly mark-to-market valuations). This interim volatility arises even if they keep the bonds until their redemption. The classic dilemma between more returns at the expense of increasing risk is always the same. Does the additional risk justify the higher marginal return? That’s the key question!

The solution if you want to avoid destroying value (caused by negative rates) would be to slightly change your strategy. Investment in longer bonds has been tested and became now unproductive. Corporate bonds could help extracting more yield providing rating tolerance is low(er). Its investment policy must therefore be reviewed if it is to free up and extract yield and obtain a minimum return or at least a result above EUR zero.



It's time, it's the moment!

Isn't it time to completely revisit your investment policy?

The problem has only lasted too long and it will continue. To do nothing or propose nothing to a CFO and Board would be pure folly. Timing and motivation come together to finally allow new investment strategies to be more aggressive without being messy or reckless. It is high time to try to put in place more dynamic strategies with “positive return” potential, at the risk of perhaps not winning at the end. But it's better to try than to lose for sure, isn't it? The treasurers seem to me to be ripe and the right time to try to change its short-term investment strategy gradually and to test new solutions and different strategies.