Reaching for Yield: Selected Issues for Reserve Managers
10 Pages Posted: 27 Apr 2012 Last revised: 29 Sep 2013
Date Written: September 1, 2003
Managers of official foreign exchange reserves have been facing historically low yields on highly rated government securities, the instruments to which they have traditionally devoted the bulk of their investment portfolios. In mid-August 2003, after eight weeks of rising long-term interest rates, the yield on the two year US Treasury note still stood at 1.86%, down from a peak of nearly 17% in 1981. It is true that much of the decline since 2001 had been the result of cuts in monetary policy rates, which had served to shift down whole yield curves. Nevertheless, even adjusting for the monetary policy cycle, yields in the major currencies have tended to be substantially lower in recent years compared to those in the previous decade. In these conditions, reserve managers have found themselves seeking instruments with higher yields in an effort to maintain the investment returns to which they had become accustomed.
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