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Coping with Zero Percent Treasury

2 min read

Executive Summary

Investment Considerations:

  • Government Sponsored Enterprises
  • Government Money Market Funds
  • FDIC TLGP Guaranteed Debt
  • Foreign Government Guaranteed Debt
  • Beware Certain “Industrial” Credits

Institutional cash investors found themselves in a pickle when the market’s desire for safety made treasury securities and treasury money market funds inaccessible. However, when the default option is no longer an option, alternative avenues may help investors mitigate credit and liquidity risks in challenging environments.
Our core strategy involves investments in securities supported, directly or indirectly, by the U.S. and certain foreign governments and steers clear of non-government credits at this time. This is a transitional strategy until we have a better assessment of the stability of global financial systems and the long-term impact of global government stimulus efforts. Even though it involves only government credits, due diligence remains crucial to this strategy.

As Treasuries Hit Negative Yields, What Now?

No one will dispute that 2008 was an extremely challenging year for all, and specifically for corporate cash managers. In past market cycles, credit calamities were often little more than a spectator sport for ultra risk-averse cash investors, but 2008 was an excruciating year as many suffered direct losses in this non-stop, 17-month credit Tsunami. After years of neglect, Treasury securities gained new-found fame with corporate treasurers as institutional investors switched from corporate “prime” money market funds to Treasury funds en masse.
But this change in philosophy created a new, pressing problem. As investors fled commercial paper investments and prime money funds seeking the protection of safe-haven treasury securities, demand overwhelmed supply to the point that short-term Treasury bill rates became negative. This means that, in addition to foregoing interest, investors are giving up part of their investment principal so that their cash can be “parked” in treasuries. This phenomenon has persisted since December 9, 2008 when the Treasury sold $27 billion of its three-month bills at a rate of 0.005%.
Treasury money market funds are now feeling the add-on effect of this new investor ideology. As we’ve previously mentioned, treasury funds are faced with unprecedented challenges of extraordinary fund inflows, dangerously low yield levels, and the risk of principal invasion from fund expenses. As a result, many large fund families have instituted fee rebates, trading limitations, and fund closings in order to prevent the funds from “breaking the dollar” and to minimize costs to fund sponsors who subsidize fund expenses.
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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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