Liquidity Management Strategies for Fixed Income Portfolios

Hard Managing Fi Portfolios Liquidity Management

As a fixed income portfolio manager at a large asset management firm, you oversee a diversified portfolio that includes various types of bonds, mortgage-backed securities, and municipal debt. Recently, due to a sudden market downturn, there has been a sharp increase in the demand for liquidity among investors. Your firm is facing pressure to maintain sufficient liquidity in order to meet potential redemption requests while still aiming to optimize portfolio returns.

You are considering different strategies to enhance the liquidity of your portfolio. Specifically, you are evaluating the balance between holding cash reserves, liquidating securities, and altering the portfolio's duration to address liquidity concerns.

Given this scenario, which of the following liquidity management strategies is most likely to maintain both liquidity and portfolio performance?

Increase the allocation to low-risk, duration-matched bonds while keeping cash reserves minimal.

Maintain a significant allocation in cash and cash equivalents to meet redemption requests, potentially at the cost of lower returns.

Diversify into higher-yield, longer-duration securities that may require longer liquidation periods to boost overall portfolio return.

Hint

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