Reaching for yield selected issues for reserve managers1英文资料.pdfVIP

Eli M Remolona Martijn A Schrijvers +41 61 280 8414 +31 20 524 2167 eli.remolona@ m.a.schrijvers@dnb.nl Reaching for yield: selected issues for reserve 1 managers 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. In considering higher-yielding alternative instruments, reserve managers must ask two basic questions. First, do higher yields actually lead to higher 2 returns? Second, to the extent that higher expected returns are a compensation for taking on greater risk, what is the nature of the risk entailed? In this special feature, we focus on a few selected cases for which these questions seem particularly interesting. These cas