Keeping the Treasury fueled and liquid requires a delicate mix of analysis, hedging and listening, with an emphasis on staying nimble in the coming months.
“Over the last eighteen months, the Federal Reserve has told you what the answer is, and the market has consistently bet against them,” said Thomas Waters, chief investment officer, Pennsylvania Department of the Treasury.
“They said they were going to raise rates, they said they were going to keep rates higher. Chairman Powell has talked about a cut that could become two by the end of the year. But it’s certainly less than what’s in market assumptions.”
The comments came during the National Association of State Treasurers’ Legislative Conference held this week in Washington. The relative health of government treasuries remains an area of public finance interest and speculation because of its direct impact on credit ratings and the ability of countries to issue debt.
According to the National Association of State Budget Officials, most states have closed the fiscal year
“State tax (revenues) are really down,” said Michael Brakebill, chief investment officer, Tennessee Department of Treasury. “A few years ago they were growing at eight, nine, ten percent a year.
Investment experts agreed with the idea of staying nimble in a financial climate affected by geopolitical instability and upcoming elections.
“We want to maintain a very liquid portfolio that is balanced,” said Ted Wright, chief investment officer, Connecticut Pension Plans and Trusts. “We have more volatile liquid public stocks in our portfolio. On the bond side, we have longer highly rated volatile liquid securities providing some balance.”
The preferred liquidity ratio is a moving target. Wright pegged Connecticut at 60% liquid, Brakebill has Tennessee at 60%-65%, Waters described Pennsylvania as “highly liquid,” and Joe Aguilar, chief investment officer for Illinois, indicated the state is nearly 90% liquid.
All CIOs seem cautiously optimistic about future bets on private equity investments that fall into the alternative asset category.
Alternative assets also include real estate, private debt and hedge funds. Some tax experts cast doubt
“If you look at the returns of the markets over the last few years, what you see is these huge swings back and forth with the public and private markets,” Brakebill said. “This past year has been a huge year for public markets, and in some portfolios, private equity has kind of lagged behind. The previous year, the public markets crashed and the private markets did really well.”
CIOS hear a lot of claims about the high returns offered by emerging markets, but when they compare the numbers to US sources of capital, domestic capitalism usually comes out ahead in the long run.
Government bonds are still attractive, but they typically come with a price. “The only thing you want to profit from is long-term Treasuries,” Brakebill said. “It’s the number one asset that protects you in a big downturn. The sad thing is that it’s very expensive to own them over the long term because they don’t have a high rate of return, but it’s still a significant part of our portfolio, around 18%.”
The fact that cash is currently paying 5% has not been lost on financial experts, but they are the first to admit that forecasting these markets is not a science. “Someone asked me what my forecasting skills were,” Wright said. “I said I just go to the pet store and get a chimpanzee and tell him to throw a dart at the wall, and he’s usually better than me.”
