The Macroeconomic Outlook and Liability Management Strategies

9 Pages Posted: 16 Jul 2013

See all articles by Niso Abuaf

Niso Abuaf

Pace University - Lubin School of Business; Samuel Ramirez and Co.; Samuel A. Ramirez and Co.

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2013

Abstract

The current macroeconomic outlook presents a duality: On the one hand, Federal Reserve forecasters believe that short-term rates will remain excessively low (0-25 basis points) for a prolonged time period, possibly extending into 2015. On the other hand, the balance sheet of the Federal Reserve has nearly tripled ($850 billion versus approximately $3 trillion) since the onset of the great contraction of 2007-2009, possibly suggesting skyrocketing future inflation accompanied by skyrocketing interest rates. This duality intuitively suggests that an optimal funding strategy might consist of short-term borrowings (to exploit the low short-term rates) coupled with long-term borrowings (to hedge against rising inflation and interest rates). In this paper, I empirically demonstrate that a barbell funding strategy is indeed on the efficient frontier, and most efficient frontier strategies consist of the barbell with episodic inclusions of the 5-year, particularly under increased liquidity or funding risk eventualities. Once we delineate the efficient frontier, the Chief Financial Officer (CFO) can choose the optimal fixed versus floating mix based on his pain tolerance for declines in earnings per share (EPS) given likely moves in short term rates.

Keywords: Macroeconomic Outlook, Funding Strategies, Barbell Funding, Efficient Frontier

Suggested Citation

Abuaf, Niso, The Macroeconomic Outlook and Liability Management Strategies (July 15, 2013). Available at SSRN: https://ssrn.com/abstract=2293928 or http://dx.doi.org/10.2139/ssrn.2293928

Niso Abuaf (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

Samuel Ramirez and Co. ( email )

61 Broadway
New York, NY 10006
United States

Samuel A. Ramirez and Co. ( email )

61 Broadway
New York, NY 10006

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