drop down into money-market curve inversion

English translation: avoid underperformance

11:00 Jan 9, 2003

English language (monolingual) [PRO]
Bus/Financial / Fund report (fixed invome)

English term or phrase: drop down into money-market curve inversion

I have trouble interpreting the following: "Meanwhile, the fund will remain ‘neutral’ with an average weighted days to maturity in the 30’s and 40’s so as not to drop down too far into the mmkt curve inversion."

Johanna Holmberg (X) KudoZ activity Questions: 536 (7 open) (10 without valid answers) (10 closed without grading) Answers: 50
Local time: 21:52

Selected answer:avoid underperformance

Explanation:
Following your earlier questions, I take it we're talking about a UK money market fund. Have a look at the structure of the UK yield curve at the very short end (see the URL below for the Libor fixings determined and published by the British Bankers' Association - rates of this morning):
2 wks 3.99375%
1 mth 3.97484%
2 mths 3.97609%
3 mths 3.97609%
6 mths 3.96297%
9 mths 3.94969%
1 year 3.96484%

As you can see, the interest rate structure is "inverted" - you get less interest for a 6-month deposit tha, say, for a 2-week or 1-month deposit. (I'm not going into the reasons for this here - contact me via my profile page if you need more background.)

I would assume that for this very reason, the fund focused its investments on the 30-to-40-day range rather than 3 to 6 months.

HTH - best regards, Ralf

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Note added at 2003-01-09 11:37:37 (GMT)
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...and BTW I don\'t find it particularly terrible - that\'s market speak for you...
;-)=)

Selected response from:

Ralf Lemster
Germany
Local time: 21:52

Grading comment

Thanks very much for your clear and knowledgeable answer. Invaluable help!
4 KudoZ points were awarded for this answer

SUMMARY OF ALL EXPLANATIONS PROVIDED

4 +1

avoid underperformance

Ralf Lemster

See explanation

Peter Coles

Answers

30 mins confidence:

See explanation

Explanation:
Johannah

Here's how I would interpret this terrible piece of writing :-).

If money market (mmkt) rates are plotted against time to maturity that creates a curve. Normally this curve will start low for short-term rates and rise for medium and long-term rates.

Sometimes it may be inverted, which usually means that it starts high in the short-term and falls in the longer term. Though it can also mean that the graph has gone from being convex to concave, i.e. the location of the steep part of the curve has changed. I'd rather hope that your fund manager has published these graphs in his report for you.

So what he is saying is that rather than take a firm position on how rates will change in the future by going to cash (ready to invest if rates go up) or buying long-term instruments (to be protected against a fall), he is arranging the portfolio in a 'neutral' way so that on average the funds will be available in 30-40 days allowing him to respond to how the markets are moving, and avoiding buying instruments for a maturity for which the rates are particularly low.

Peter Coles
Local time: 20:52
Native speaker of:

English
PRO pts in pair: 47

35 mins confidence:

peer agreement (net): +1

avoid underperformance

Ralf Lemster
Germany
Local time: 21:52
Native speaker of: German
PRO pts in pair: 377

Grading comment

Thanks very much for your clear and knowledgeable answer. Invaluable help!

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