April 2023

With volatility still at a heightened level from the failure of Silicon Valley Bank, Signature Bank, and First Republic, we thought it would be an opportune time to discuss how we’ve positioned our Reserve Cash Management strategy (RCM).  As the name implies, the RCM is a separately managed account strategy designed to generate returns in excess of the money market universe with a somewhat similar risk profile.

The short-maturity fixed income landscape is vastly different than last year.  Namely, the overnight lending rate corridor is 5.0% to 5.25% and we’re likely at the peak of that rate for this cycle.  Moreover, the Fed Funds futures market is anticipating that the Fed will cut the overnight rate later this year and will ultimately take the Fed Funds rate below 3.00%.

While that may come to pass, for now the upheaval has resulted in opportunities for us to add value in both the corporate bond and the Treasury Bill markets.  As one can imagine, Bills are usually not the topic of much discussion, but the expanded SEC liquidity buckets for money market funds, the flight to quality bid from SVB and FRC as well as the ongoing debt ceiling debate has produced a trading environment in the near-term Bill curve unlike anything we’ve seen in years.   We have been actively selling near-term Bills at levels as expensive as 65 basis points below where we are buying securities just a month or two longer.

In the investment grade corporate space, we have been adding paper maturing in the latter-half of 2023 through the first half of 2024, with yield-to-maturities ranging from 5.3% to 7%.  We continue to be extremely selective and are still focusing our buying on single A paper and above in an effort to increase credit quality as we enter the economic slowdown that we expect in the near term.

With that said our RCM composite has started to perform nicely relative to its benchmark.  The RCM composite has a weighted average maturity of approximately 6 months and a yield to maturity of 5.19% as of April 30th.  As always, our portfolios are fully customizable based on client’s individual liquidity needs.

Turning to the markets, on May 3rd the Fed, as was widely expected, raised the overnight interest rate by 25 basis points.  At his post-FOMC press conference, Chairman Powell reiterated Yellen’s assurance that the U.S. banking system is safe and “sound.”   The press conference started out as the usual softball fest of Q&A, until CNBC Senior Correspondent, Steve Liesmann, asked Powell about his response when he was informed in February that Silicon Valley Bank and several other banks were sitting with hold-to-maturity portfolios that were substantially in the red.  Powell responded “It wasn’t — it wasn’t presented as an urgent or alarming situation. It was presented as an informational non-decisional kind of a thing.”  Liesmann responded “I’m sorry.  I don’t mean to be argumentative, but the staff report said SVB has significant interest rate risk. It said interest rate risk measurements failed at SVB, and it said, Banks with large unrealized losses face significant safety and soundness risks. Why was that not alarming?”  Powell, clearly frazzled, offered a comment that neither affirmed nor denied Liesmann’s observation, then moved on to the next questioner.  Despite assurances from Yellen and Powell that the U.S. banking system is safe and “sound,” the regional bank ETF is down over 40% since March 1st, a clear sign that investors aren’t buying their assurances!

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