Mind the curve

With fixed income volatility near historic lows and interest rates increasing slowly, a natural lull can occur among market participants around their investments. This same complacency can and does occur among Portfolio Managers who tend to relax when the economy and markets are stable. There are opportunities within stable markets and ignoring these create the potential for significant opportunity cost. Given that, it may be time to consider utilizing the two year part of the curve and extend shorter maturities. The yield curve has flattened dramatically over the past five years, making the 3yr, 5yr and 10yr look expensive versus the 2yr (please see chart). The only part of the curve with significant steepness is one month bills to the 2yr treasury, which currently is pick up of 71 basis points.

Over the course of time, portfolios naturally age and cash builds from interest payments. If a portfolio manager is not actively watching these factors, opportunities can be lost. For example, money market accounts at banks are yielding 1.6%-1.85%. One year treasury and agencies are yielding around 2.65%. We would recommend clients hold little cash and extend shorter maturities. Examples of securities we like are the 2yr treasury at 2.91%, 2yr CD at 3.05% and a recent Federal Home Loan Bank (agency) 2yr issued at 3%. Investing cash and extending shorter maturities can add substantial income for clients; don’t fall into the lull of the markets, mind the curve!

For more information on this topic, or to learn how Baker Tilly investment specialists can help, contact our team.