Your investment policy might be out of date if a banker’s acceptance (BA) is considered an eligible investment.
The Economic Research Division of the Federal Reserve Bank of St. Louis (FRED) provides 765,000 U.S. and international time series from 94 sources. BA rates are no longer on the list. FRED discontinued the series 20 years ago. BAs were previously commonly used for international trade financing, as an exporter would prefer payment before the goods shipment, and an importer would prefer to receive goods prior to payment. Regardless, the seller risked nonpayment by the buyer.
Enter a bank guarantee: the importer’s bank drafts a BA, which is a promise to pay the exporter 90 days hence. On that date, the bank debits the importer’s account. Ninety (90) days provides more than enough time for delivery of the goods. So, a secondary market is soon developed for BAs. Once the exporter receives the BA, they could sell it in the open market at a discount from its value at maturity.
Moral of the story: new players and new methods of payment for international trade have been developed.
Your investment policy might be out of date if it does not address negative yields. Toward the end of March 2020, U.S. Treasury bill (T-bill) rates were negative out to three months. In Japan, government bond yields are negative out to 10 years. In Germany, the entire yield curve is negative out to 30 years.
Now is the time to review your investment policy and have a conversation with key stakeholders.
For more information on this topic, or to learn how Baker Tilly public sector investment services specialists can help, contact our team.
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