A historically long stretch of low rates continues to force investment managers to consider alternative ways to find yield. In a session at the NeuGroup’s Treasury Investment Managers’ Peer Group, members explored ways to add incremental yield through a few different avenues.
Holding too much cash of course can be a drag on overall yield, TIMPG members agreed. But adding yield can be challenging and every investor has different risk parameters and liquidity needs. A banker at the meeting explained that Tier 2 offers significant yield pickup over AAA money funds.
Other members across the NeuGroup peer group universe have been exploring alternatives, according to cross-group data. When asked whether they have invested in or are considering alternative products to prime funds almost half said yes. These include, government funds, bank deposits, commercial paper, repo, separately managed accounts, ultra-short bond funds and in-house investments. Another vehicle that has seen double-digit growth include are structured bank deposits.
Also recommended at the TIMPG meeting was purchasing short corporate issuance and to consider the triple B space. That’s because some corporate bonds have higher yields than most investment grade bonds but less credit risk than the high yield market as a whole. Further, the credit sector’s spreads are historically tight. That’s because while supply has been high, strong technicals and persistent demand continue to tighten spreads.
Members were also told that they should expect the yield curve to steepen; currently the market is pricing in significantly higher front-end yields. It was recommended that members consider floating-rate debt over fixed for interest rate protection.
Another observation: demand for short-duration assets continues to benefit asset-backed securities. Credit quality in the shorter duration ABS issuance is slowly deteriorating; bankers at the meeting suggested auto loans were worth a look. Although recent rising delinquencies have seen some issues increasing in yield, bankers at the meeting were still comfortable with the sector in the AAA space.
TIMPG members looking for incremental yield have several pockets to choose from, including the liquidity cash bucket. Incremental yield can be found for those members that look outside government money funds. Although credit spreads are near historical levels in terms of tightness, the sector still looks attractive to gather a little bit of yield.