In December 2015, the Federal Open Market Committee (FOMC), raised the upper band of the overnight Funds Rate by 25 basis points, to 0.50 percent from 0.25 percent. A basis point is 1/100th of 1 percent. It was the first-rate hike since the Great Recession of 2008.
By December 2018, the committee gradually raised the Funds Rate until it reached 2.50 percent. Cash managers enjoyed a corresponding increase in interest income on checking and savings accounts, money market funds and government investment pools. Earnings on these vehicles drifted higher with overnight rate increases.
Normally, the U.S. Treasury yield curve, across all maturities from one month to thirty years, is positively sloped. Investors demand more and more yield for extending longer and longer; the thirty-year tenor typically offers the highest yield.
By Jan. 1, 2019, due to several factors, the yield curve was partially inverted. Specifically, the yield on the three-month Treasury (2.36 percent) was less than the yield on the one-month Treasury (2.43 percent), and both were below the Funds Rate (2.50 percent). See the chart below. The FOMC was ‘behind the curve’.
The FOMC cut rates on July 31, 2019 and again on Sept. 18, 2019. The Funds Rate now stands at 2.00 percent. More cuts are on the way! Another is expected by December.
The chart also shows:
What are the implications of rate cuts and inversion for cash management? Earnings on investment vehicles tied to overnight rates have dropped and are headed lower but there are strategies to offset earnings shortfalls.
It may be appropriate to invest idle or excess funds in a ladder, barbell or bullet portfolio of fixed-income securities.
Now is the time to consider changing your cash management strategy. Contact the professionals at Baker Tilly Investment Services for recommendations tailored to your unique situation. We believe change is progress.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
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