Capital Advisors Group published a new report entitled, "Institutional Cash Investments in the Covid-19 New Reality." It tells us, "Extraordinary market volatility from COVID-19 led to a complete reset of portfolio strategies and expectations in cash investments. While liquidity has turned the corner, the path to recovery and a normal investment environment may be a long one. Fighting credit issues on one hand and the risk of negative interest rates on the other, treasury professionals should remain focused on liquidity management, take comfort in the Fed's support programs, and proactively extend portfolio duration." The CAG report continues, "Extraordinary actions were taken by the Federal Reserve and the Trump Administration to provide much-needed lifelines to the financial markets and direct cash payments and loans to keep businesses operating and to support furloughed employees.... Institutional cash portfolios must also contend with a different interest rate and credit landscape from two months ago. While we see plenty of signals to suggest that liquidity has turned the corner, the path to recovery and a normal investment environment may be a long and winding one." It adds, "While medical and economic solutions may be months away, financial markets adjusted swiftly to a lower-for-longer interest rate environment -- which presents a big challenge to treasury professionals. As securities roll off and are replaced with new purchases, portfolio yields are expected to decline precipitously in money market funds and separate accounts. The story is similar in the deposit space, as the Federal Reserve again flushes the banking system with ample reserves that depress deposit rates. Meanwhile, credit conditions may deteriorate further as shutdowns linger, putting more stress on corporate balance sheets and bank loan books. What is a treasury investor to do in this environment? The urge to wait out the yield drought may not work this time, as COVID-19 will likely cast a long shadow on the economy. The possibility of the Fed doing more to help the economy introduces concerns about negative interest rates. Protecting cash portfolios from COVID-related credit issues and principal erosion from negative rates creates tension in portfolio strategies that treasury professionals cannot avoid. To decide where to go from here, it helps to understand where we were and how we came to the current state of the liquidity market."

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