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Text on screen: What has been the impact of the flight to “safety”?
Text on screen: Jerome M. Schneider, Head of Short-Term Portfolio Management
Jerome Schneider: Today’s economic environment is one fraught with uncertainty, where being selective in risk taking will likely prove to be beneficial.
Focusing on the defense is important,
Text on screen: A Mountain of Cash Earning Near-Zero Yields
A line chart shows 7-day yields by percentage, compared to money market fund assets. A gray bar portrays money market funds AUM; a blue line shows government retail money market funds and a green line shows prime retail money market funds by date over time from June 1, 2017 to June 1, 2020. The green line stays above the blue line as they both rise to a high above 500 and 4500 respectively, while the blue line falls to zero at the end with the green line just barely above it. The gray bar stays near 3000 throughout the chart but rises to nearly 5000 in March, 2020.
in fact, we’ve had over $800 billion year to date and over $2 trillion the past three years into money market funds as investors have grown more defensive.
Although the Fed’s policy response – really, cutting rates as well as providing liquidity through its various programs – has resulted in money market funds really being a safe haven, the cost to investors is growing. Money market funds currently yield about 0%, just over, and as a result, it’s going to have a dramatic impact on savers for the foreseeable future.
Text on screen: Why is this recovery likely to be different?
Interest rates are expected to remain depressed for years versus the prior recovery periods that we’ve seen. In fact, when you compare 2012 through 2015, another 0% interest rate cycle, we see that the expectation for interest rates was actually going to be moving higher over the foreseeable future.
Text on screen: Futures markets have priced Fed Funds rate lower for longer
A line graph shows implied forward Fed Funds Rate by percentage over time, with one month, three months, six months, one year, two years, and three years as benchmarks. A green line shows August 2012 holding near .12 percent until one year, when it shoots up to .22 percent at two years and then 0.57 percent at the three-year mark. A blue line shows August 2020, which starts at 0.10 percent at one month, dips slowly to -0.02 percent at two years, and rises to .05 percent at three years.
Today, we see the exact opposite with interest rates remaining at or below near zero for the foreseeable future. Truly, a secular phenomenon that we’re going to have to contend with.
Text on screen: How can investors better optimize their cash?
It’s time for investors to be conscious of their cash. A broader opportunity set affords potential for additional yields beyond money market funds for a modest increase in risk.
Text on screen: Broader opportunity set offer potential for additional yields
A line graph shows maturity yields by percentage for money market eligible securities on the left, with non-money market eligible securities on the right. The money market eligible securities start at overnight and run through 9-month securities, while the chart on the right starts at 1-year and runs through 5-year. A line at 1-year bisects the chart. The money market eligible securities include CP (maroon line) and CDs (light blue line), which both rise to above 3.5 percent after 8 months. Agencies and Treasuries start in the left side and rise on the right side, depicted as a green line and black line respectively. On the right side, a dark blue line portrays AA-rated corporates rising to just under .7 percent at the 5-year mark; a yellow line showing A-rated corporates rising to .8 percent at the 5-year mark and a sea blue line representing BBB-rated corporates rising to just above 1.2 percent at the 5-year mark.
Investors can do better than those immediate liquidity solutions if their time horizon is beyond a few weeks or even a few months by stepping out of those restrictive money market funds and capturing the premiums that exist today and will likely exist into the future.
Text on screen: Objectives: liquidity, capital preservation, and attractive return to potential
Image of PIMCO trade floor and Jerome Schneider
At PIMCO, we aim to benefit from these higher yields and these structural premiums, at the same time focusing on downside protection and most of all, liquidity management and capital preservation.
So despite the zero rate environment that we’re seeing at this point in time, clients should be focused on opportunities which are diverse enough, high in quality, and most importantly, can actively adapt to the changing landscapes to help produce positive total returns over secular horizons.
Text on screen: For more insights and information visit pimco.com.
Text on screen: PIMCO
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Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
A “safe haven” is an investment that is perceived to be able to retain or increase in value during times of market volatility. Investors seek safe havens to limit their exposure to losses in the event of market turbulence. All investments contain risk and may lose value.
A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. Diversification does not ensure against loss.
It is not possible to invest directly in an unmanaged index.
Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
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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