Must investors settle for sub-zero real returns on their cash allocations?

November was a vintage month for risk assets, and investors scrambled to get exposure. Even at the beginning of the month, Bank of America’s regular fund manager survey revealed cash holdings plummeting to a level unseen for more than five years.

But not all investors are fund managers. Some have to hold cash because of regulations or investment guidelines. Some can hold nothing but cash or cash-like investments because they manage a corporate treasury or similar pool of highly liquid assets. And some may wish, like our own Asset Allocation Committee, to remain balanced—with an underweight view on cash, but not a zero weight.

Must they settle for the deeply negative real yields on cash and money market funds?


We do not think so.

One of our “Ten for 2021” investment themes is that “low yields and flat curves demand opportunism in credit markets.” To achieve reasonable yield, we think investors need to embrace credit risk; be flexible enough to “go anywhere” based on rigorous relative value comparisons across regions, maturities, credit sectors and ratings; and seek out niche markets where they may have an edge, from taxable municipal bonds to corporate hybrids, securitized credit to foreign exchange.

We believe a similarly solid framework is required to squeeze positive real returns out of an enhanced cash portfolio. And while capital preservation and liquidity impose necessary constraints, many of the guidelines above apply here, too.


We think enhanced cash investors need to embrace credit, duration and, where they can, geographical risk.

In euros, for example, recent monetary policy has rendered both German and French government bond yields deeply negative far out along the curve. Italian, Spanish and investment grade corporate bond curves remain relatively steep, however, which means that they still offer the carry and roll-down returns that are generated mechanically as bonds gradually mature.

Here, we believe the edge you need is a good understanding of local risk and the likely evolution of central bank policy.

In U.S. dollars, a variety of deep, liquid investment grade credit opportunities can be explored, from corporate bonds to asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities. The latter still offer positive real yields even at the shortest maturities, for example.

Here, we think that our edge comes from long experience structuring securitized products and investing in them.

Risk Budget

Flexibility is important, then, for identifying opportunities that marry yield pick-up with robust credit quality and reliable liquidity. But it can also help to tailor that flexibility to the profile of the portfolio mandate.

Cash and cash-like portfolios generally have strict capital preservation and liquidity constraints. But they are not all the same. Can an investor tolerate a negative asset value for a day, a week, a month, a quarter or not at all? Must the entire portfolio be ready to liquidate in one day, two days or a week?

Right now, small differences in these risk tolerances could make a big difference to the potential for yield pick-up. Customizing an enhanced cash strategy may enable investors to squeeze every bit out of a portfolio’s risk budget.

Could these conditions persist for much longer? We think they may, and forward interest rate curves agree with us. Many European and Japanese cash portfolio managers have already faced these challenges for years—and the U.S. Federal Reserve is warning dollar investors to prepare for the same thing.

Notwithstanding investors’ current appetite for risk, that is why we believe well-designed enhanced cash strategies will continue to “generate interest” for a long time to come.

In Case You Missed It

  • China Caixin Manufacturing Purchasing Managers’ Index: +1.3 to 54.9 in November
  • Eurozone Consumer Price Index: -0.3% in November year-over-year
  • U.S. ISM Manufacturing Index: -1.8 to 57.5 in November
  • U.S. Initial Jobless Claims: +712,000 for the week ending November 28
  • ISM Non-Manufacturing Index: -0.7 to 55.9 in November
  • U.S. Employment Report: Nonfarm payrolls increased 245,000 and the unemployment rate decreased to 6.7% in November

What to Watch For

  • Monday, December 7:
    • Japan 3Q 2020 GDP (Final)
  • Tuesday, December 8:
    • Eurozone 3Q 2020 GDP (Final)
  • Thursday, December 10:
    • European Central Bank Policy Meeting
    • U.S. Consumer Price Index
    • U.S. Initial Jobless Claims
  • Friday, December 11:
    • U.S. Producer Price Index

– Andrew White, Investment Strategy Group

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