Reserve Managers Scout for Credible Alternatives

Central banks and official reserve institutions are in change mode. Investment returns are ranked lower on criteria as compared to safety and liquidity. For some central banks, liquidity has a higher priority than capital preservation. Reserve managers face a tough dilemma, find a safe haven to park funds but be concerned about the U.S. credit downgrade and future value of the U.S. dollar.

In the past few months, several central banks have lowered exposure to bank commercial paper, certificates of deposits, and time deposits. The European financial crisis has shaken the confidence of reserve managers and many want to limit exposure in the banking sector. The European monetary union is under pressure, while member countries try to deal with mounting public debt. Many countries have lived beyond their economic means. The global crisis has caused a flight to safe haven government bonds such as the United States, Japan, the United Kingdom and Germany.

Demand for safe haven sovereign debt has lowered yields, giving rise to opportunistic investors in second tier debt markets.

The Japanese yen is enjoying safe haven status as it jetted to an 11-year peak against the euro in January 2012. Despite loose monetary policy by the Federal Reserve, globally reserve managers see U.S. treasuries as the safest liquid asset in absence of a credible alternative. Some central banks are leaving Eurozone government bonds besides Germany, France, and the Netherlands.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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