How to Navigate COVID-19 Credit and Interest Rate Risks
Trillions of dollars of support from the Fed have helped keep financial markets open. Trillions more from Congress are supporting consumers. But what will the next phase of the COVID-19 crisis bring? And what does it mean for institutional cash managers? You can find many of the answers in our latest research report, Institutional Cash Investments in the COVID-19 New Reality.
Since the economy shut down in March, treasury professionals have confronted the most challenging environment in their lifetimes. Perhaps the one bright spot is that the Fed drew on hard lessons from 2008 and intervened early to prevent what might well have turned into the mother of all liquidity crises. But with interest rates hovering at just above zero, managers have had to start worrying about the possibility of negative returns on cash portfolios.
Meanwhile, fiscal stimulus from Congress has propped up hope that corporate America may be able to weather an extended downturn and avoid a broad commercial credit crisis. But with the economic damage spread unequally, cash managers must navigate a minefield to avoid the highest-risk credits (cruise lines, anyone?).
We hope our research report will help you survive this challenging time. Among other things, it provides a clear guide to the alphabet soup of support programs launched by the Fed. Understanding them provides extremely helpful insights into which industries may benefit most from the support – and which credits may be safer for your cash portfolio.
It also provides top-level strategic guidance for an effective portfolio management plan. Liquidity is job one, so building cash buffers with safe government money market funds or government obligations may be prudent. Look for issuers that stand to benefit most from the Fed facilities providing back-up support. And look hard at your mix of cash investments: extending duration of purchases may help avoid having to reinvest at lower or even negative rates in the near term.
With any luck, science will eventually bring effective therapies or even a vaccine, and this too shall pass. But in the meantime, the going will be tough, so it’s time for the tough to get going.