Manage liquidity
We think investors should limit their cash balances and seek to lock in the best available yields, given expected interest rate cuts this year and next.
Interest rates look likely to stay higher-for-longer in the US, but not forever. We expect cash to deliver progressively lower returns over the coming two years, creating a reinvestment risk for investors who do not proactively manage cash holdings. We believe investors should build a liquidity strategy beyond cash and money market funds, including fixed-term deposits, bond ladders, and structured investment strategies to cover expected portfolio withdrawals over the next five years.
Fixed term deposits
Fixed term deposits
Interest rates on cash are likely to fall in most major economies this year. The Swiss National Bank began its rate-cutting cycle in March. We expect the European Central Bank to follow suit, starting in June, and the Bank of England to start cutting in early August. While higher-than-expected US inflation in recent months may keep the Federal Reserve on hold for now, we still expect 50 basis points of interest rate cuts this year, likely starting in September, with further easing in 2025. And in the event of a growth misstep, central banks would likely reduce rates more quickly.
With this in mind, we believe investors should consider using fixed-term deposits to lock in currently high yields on cash and money market deposits for potential expenses and liabilities up to 12 months out. Investing in fixed-term deposits of different maturities can also help match liabilities and reduce interest rate and reinvestment risks. Investors concerned about issuer and counterparty risks can diversify their deposits.
Bond ladders
Bond ladders
To cover net expected portfolio withdrawals over the next one to three years, investors can consider buying a series of individual short-duration bonds of varying maturities, staggering their expiry to provide a steady stream of income. We see the reinvestment risk from holding cash as greater than the potential gains from waiting for better bond prices, and therefore recommend investors take steps to lock in currently attractive bond yields. Investors can also consider more active and diversified fixed income exposure, which can provide a convenient way to realize the full return potential of the asset class while managing global interest rate, credit, and concentration risks.
Structured strategies with capital preservation features
Structured strategies with capital preservation features
For cash intended for use in three to five years’ time, liquidity and safety concerns need to be balanced with the opportunity costs from potential stock market rallies. Structured investment strategies, which allow investors to take part in market gains but with capital preservation features, can provide a potential solution. The current environment of high yields means pricing for such strategies remains favorable.
Investors should note that changes in interest rates, implied volatility, and dividend levels can also influence the pricing of structured strategies. Investors should be aware of the added risks they bear when using structured strategies or other options-based strategies, including the possibility that the issuer does not meet its obligations or repay an investors' principal at maturity.
Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.
