Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.
In the current low-interest rate, low-yield environment, investors of short-term cash portfolios are facing significant challenges. Yields on traditional short-term vehicles have been declining steadily for years. Changes to the Securities and Exchange Commission's Rule 2a-7 and Europe's Institutional Money Market Fund Association Code of Practice, as well as other industry and regulatory proposals, have further constrained money market funds, another popular type of short-term investment. Overall, there is also a smaller supply of traditional, high-quality short-term securities. As a result, investors might want to consider a mix of investments with longer maturities and/or lower credit quality. This not only provides an opportunity to increase yield, but also broadens the portfolio's diversification.
Yields on short-duration instruments have been falling steadily since 2009, and the U.S. Federal Reserve Board has committed to keep rates low through 2014.
The constraints introduced by a low-yield environment have been further complicated in the United States by more stringent rules governing money market funds. Beyond the changes already implemented in 2010, additional proposals include switching to a floating net asset value, capital set-aside requirements and restrictions on redemptions.
As yields tighten, and regulatory bodies impose rules around liquidity, investors are finding a smaller pool of high-quality, short-duration investments that meet their investment mandates.