Text on screen: PIMCO
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Text on screen: Jerome Schneider, Head of Short-Term Portfolio Management
Jerome Schneider: A lot of financial advisors and their clients have been raising concerns about the recent volatility in short-term markets, as higher yields in the front end have caused yield curves to flatten. So what does PIMCO make of these moves? Undoubtedly, the past 2 years of easy monetary policy has unleashed a torrent of liquidity throughout the marketplace, and as we approach normalcy, or a perceived normalcy of interest rates over the next few years, perhaps that does tighten, and more importantly, investors should be prepared for small bouts of volatility which could persist, not only in the broader marketplace, but also within liquidity markets. For short-term investors, this is especially poignant time to begin to evaluate the prospects of what's going to be changing in the landscape of cash management. Those short-term investors typically are focused on capital preservation, as well as income generation and liquidity management for those cash allocations, which are increasingly high, with money market allocations approaching 4.5 trillion today, undoubtedly, both institutional and retail clients are faced with a similar consequence, especially with rates near zero.
In fact, we're unlikely to see anything happen until mid to late 2022 with regard to interest rate increases, which means for those cash investors today, we’re going to be held with the prospect of earning near-zero returns on cash, unless we take a more dynamic and active approach to cash management in this environment. We suggest at PIMCO that we continue to take an active approach to this environment, specifically looking to diversify portfolios, even in short-term liquidity-minded portfolio constructions. And more importantly, look to adapt and be defensive to various risks in the marketplace, both emerging from interest rate sensitivity as well as credit sensitivity.
We like to look at other ways to diversify the portfolio, perhaps into structured products, perhaps looking even beyond the realm of the United States, which can offer a variety of different instruments, as well as premiums, versus what we are seeing here in the United States. But keeping an open mind, and more importantly, keeping open degrees of freedom, even in the cash management space, is incredibly important. So the benefits of tiering your cash, knowing what you need today, as well as what you need for the immediate future, is a starting point for this discussion. And then, as a practical matter, investors can really look to manage cash allocations in a more active manner, despite the Federal Reserve's intentions to bring more normalized policy measures over the next few years.
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Text on screen: PIMCO 50 1971-2021
Recorded 16 November 2021
(Money Market Statistics) Source: Investment Company Institute, https://www.ici.org/research/stats/mmf November 11, 2021
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Structured products such as Collateralized Debt Obligations (CDOs), Constant Proportion Portfolio Insurance (CPPI), and Constant Proportion Debt Obligations (CPDOs) are complex instruments, typically involving a high degree of risk and intended for qualified investors only. Use of these instruments may involve derivative instruments that could lose more than the principal amount invested. The market value may also be affected by changes in economic, financial, and political environment (including, but not limited to spot and forward interest and exchange rates), maturity, market, and the credit quality of any issuer. Diversification does not ensure against loss.
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