PM’s Perspectives are a series of short interviews with senior members of Invesco’s Global Liquidity Portfolio Management Team. They provide market views and insights straight from our investors at a firm with more than 40 years of successfully managing global liquidity portfolios.
Q: Do you see potential opportunities to help bolster yield now that the Federal reserve (Fed) has begun easing policy rates?
Marques: Unfortunately, there may not be many good options currently to help improve yields because the market has been anticipating Fed easing for quite some time. That’s reflected in the two-year US Treasury note below 4% at the end of August 2024, and short-term US Treasury bill yields starting to decline in earnest early in Q3 2024.1
In the current environment, we believe that money market fund positioning and amortized cost accounting can allow for a fund’s yield to potentially react more slowly to easing than individual money market securities. Legacy security positions purchased in a money fund prior to the actual easing potentially create a lagging effect, or slower downward yield trajectory, compared to individual money market securities.2
Q: How can investors think about reallocating assets within their cash/liquidity portfolios to help optimize return potential while still keeping an eye on safety and liquidity?
Marques: While money market funds seek safety and liquidity, short-term securities or low duration bond strategies may offer opportunities to enhance total return potential. They may provide additional income as the Fed eases and after the yield curve normalizes to a positive slope. Keep in mind that short-term securities are more price sensitive to short-term interest rate movements compared to money market funds.
Q: When was the last time we were in a declining rate environment? Can you describe the circumstance and what's different today?
Joe: The last easing cycle began in July 2019. This was the first easing cycle since the 2008 Great Financial Crisis. Starting in July 2019, the Fed cut policy rates in a series of three consecutive 25 basis point (bps) moves. By the time they were done, rates were at 1.5%ꟷ 1.75%, nowhere near where we are today, or where we were before the crisis.
Then Covid-19 struck in March 2020. Within two weeks of the beginning of the pandemic, the Fed took rates back down to zero.
What’s distinctive this time is that the Fed started to hike policy rates very quickly and aggressively, although it began slowly in March 2022 with one 25 basis point (bps) move, then aggressively hiked over the next 19 months, including four consecutive 75 bps hikes, to a range of 5.25 – 5.50% ꟷ rates I haven't seen since the early part of my career. And during those eight years of zero interest rates, I never would have thought we'd get back to this level of Fed fund rates again!
When we look at the market now, it’s pricing in a 3% – 3.25% range in the terminal Fed funds rate.2
Q: What opportunities do declining rates create for liquidity investors?
Marques: The way I think about it is: The propensity to add duration comes with early anticipation. In an easing environment, the decision to add duration originates from the early anticipation of when interest rates could move lower.
Adding duration can potentially slow a downward yield trajectory and may help preserve fund returns. The hard part about being portfolio managers is when we’re extending out the yield curve, we’re inherently buying yields that are lower than current overnight yields, which feels like a counterintuitive decision. But we believe it's the right thing to do once the Fed starts cutting interest rates. A longer-duration strategy can potentially help protect a portfolio’s income generation and even provide additional total return potential.
Q: What do you want investors to know about how you’re looking at liquidity markets?
Joe: The point I’d make is that whether you look at intermediate or long-term interest rates, we believe that money market rates are still attractive due to the still inverted yield curve. While we expect a gradual decrease in rates as the Fed normalizes their interest rate policy, money market funds are still a low-risk investment strategy offering high utility of principal stability and daily liquidity. Over the coming months, there’s destined to be noise in the markets and we believe that in a slow, measured easing cycle, money funds can help investors navigate potential volatility.
Q: Besides money funds, what other potential opportunities exist for investors who want to actively manage their cash/liquidity portfolios to seek additional yield/return outcomes?
Joe: For investors who want to lock in yields over the next few years, we believe short duration bond funds look attractive. They have less interest rate risk than long duration bond funds, given the relative flatness of the US Treasury curve. Additionally, there are several styles of mutual funds and exchange traded funds for clients seeking taxable/tax-exempt options with varying risk profiles to help meet their liquidity goals.
Invesco has been serving and guiding Treasury professionals efficiently through the global liquidity markets for more than 40 years. We understand the high-stakes decisions you make every day and are committed to helping you achieve the optimum balance of principal preservation, ready liquidity, and competitive yield for your short-term investments.
Amortized cost accounting is the method of calculating an investment company’s (i.e. money market fund’s) net asset value whereby portfolio securities are valued at the fund’s acquisition cost as adjusted for amortization of premium or accretion of discount rather than at their value based on current market factors.
A basis point (bp) is a unit that is equal to one one-hundredth of a percent.
Duration measures a bond's or fixed income portfolio's price sensitivity to interest rate changes. The longer the duration, the greater the expected volatility as rates change.
Federal funds rate is the rate at which banks lend balances to each other overnight.
Quantitative easing is a monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.
Terminal rate is the anticipated level that the federal funds rate will reach before the Federal Reserve stops its tightening policy.
A yield curve is a curve showing several yields to maturity or interest rates across different maturity lengths for a similar debt contract. An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.
Bloomberg L.P., as of August 30, 2024
Source: Invesco
As of June 30, 2024. Invesco Global Liquidity’s total assets under management are composed of all cash management products, including global institutional, retail, and customized vehicles.
Source: Invesco Ltd. $1.72 trillion. Investment professionals and AUM are as of June 30, 2024, and include all assets under advisement, distributed and overseen by Invesco.
Source: iMoneynet. As of December 31, 2023, Invesco ranked 12th in US institutional money market managers, by AUM.
With money market assets at record highs and shareholder cash flows moving from one fund to another, clearly many investors are chasing returns versus maintaining a longer-term view.
Ultrashort funds seek to provide higher yields and total returns than money markets and other cash alternatives. We believe it’s a good time to consider one for your clients’ cash allocation.
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About risk
There is no guarantee the strategies discussed will perform as intended. The investment techniques and risk analysis used by the portfolio managers may not produce the desired results. All investing includes risk, including the risk of loss.
Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
There are risks involved with investing in ETFs, including possible loss of money.
Investors should be aware of the material differences between money market funds (MMFs), mutual funds and ETFs. Government and Constant NAV Retail MMFs seek to preserve your investment at $1.00 per share but cannot guarantee it will do so. Floating NAV MMFs share prices will fluctuate, so when you sell your shares, they may be worth more or less than what you originally paid for them. Constant NAV Retail and Floating MMFs may impose a fee upon the sale of shares. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability to react to market changes and the potential to outperform a stated benchmark. Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs. ETFs can be traded throughout the day, whereas mutual funds are traded only once a day. While extreme market conditions could result in illiquidity for ETFs. Typically, they are still more liquid than most traditional mutual funds because they trade on exchanges. Investors should talk with their financial professional regarding their situation before investing.
Before investing, investors should carefully read the prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their financial professionals for a prospectus or visit invesco.com/fundprospectus.
All data as of June 30, 2024, unless otherwise noted.
The opinions expressed are those of the author(s), are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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