The Year Ahead Manage liquidity

Interest rates on cash are poised to fall in 2024, in our view, as global growth slows and inflation continues to moderate. With this in mind, we believe investors should use fixed-term deposits to lock in currently high yields on cash and cover potential expenses and liabilities up to 12 months out. Investors concerned about issuer and counterparty risks can diversify their deposits. Investing in fixed-term deposits of different maturities can also help match liabilities and reduce interest rate and reinvestment risks.

Bond ladders can help provide investors with added certainty over future returns. A bond ladder involves buying a series of individual short-duration bonds of varying maturities, staggered to provide a steady stream of income, and aligned with the size and timing of expected portfolio withdrawals over the next 12–36 months. With the Fed likely to cut interest rates in most economic scenarios, we advocate locking in yields today rather than waiting for a potential first-quarter retracement as supply comes to market. Holding quality bonds may also offer scope for capital gains in downside economic scenarios.

For cash intended for use in 3–5 years’ time, liquidity and safety concerns need to be balanced with the opportunity costs from potential stock market rallies. Investors concerned about limiting losses but who also wish to participate in further equity gains can consider structured investment strategies with capital preservation features. Equity market volatility is still low by historical standards, improving the pricing of such strategies. We suggest using these tools to cover longer-term liabilities, since costs may apply if investors need to sell before maturity.

Changes in interest rates, implied volatility, and dividend levels can also influence the pricing of structured strategies. Investors should be aware of the additional risks borne when using structured strategies or other options-based strategies, including that the issuer fails to meet its obligations or repay an investor’s principal at maturity.