Core Focus: The expansion into non-traditional asset classes—including investment-grade corporate bonds, developed and emerging market equities, and securitised credit—and the risk-return characteristics of each.

In-Depth Notes:
The move into non-traditional asset classes has been one of the most significant trends in reserve management over the past decade. Reserve managers with reserve buffers generally exceeding $30 billion have far greater investment and risk management flexibility than those with smaller pools of assets . These larger reserve holders have broadened their exposure into a range of non-traditional asset classes.

Investment-Grade Corporate Bonds:
Corporate bonds offer higher yields than government bonds with manageable credit risk. Reserve managers typically limit their investments to investment-grade corporate debt (BBB- or higher) to preserve safety. The inclusion of corporate bonds in reserve portfolios can enhance expected returns without significantly increasing overall portfolio risk . Some managers also include emerging market debt in their portfolios .

Equities:
The inclusion of equities in reserve portfolios has been a significant departure from traditional practice. Several factors have driven this shift. Countries that have expanded their reserve holdings as part of exchange rate intervention have excess capacity to invest in higher-yield assets . The inclusion of equities in reserve portfolios typically reflects a more efficient use of reserves in excess of the amount required for precautionary purposes .

Some central banks have explicitly stated that equities are included in their reserve portfolio because reserves exceed required precautionary balances . By comparison, many countries with a free-floating exchange rate, such as Australia, Japan and the United Kingdom, do not include equities in their portfolios . Research has shown that equities can improve portfolio returns, but they are more susceptible to falls in value, particularly in periods of market stress when reserves are more likely to be required .

Securitised Credit (Mortgage-Backed and Asset-Backed Securities):
Some reserve managers include mortgage-backed securities (MBS) and asset-backed securities (ABS) in their portfolios . These instruments offer higher yields than government bonds with moderate credit risk. However, they are less liquid than sovereign bonds and can experience significant price volatility during periods of market stress.

Central Bank Digital Currencies (CBDCs):
A central bank digital currency (CBDC) is a digital version of a nation’s fiat money, issued and backed by its central bank. In emerging economies, CBDCs are viewed as tools to boost financial inclusion, modernise payments, and reduce dependence on unstable local currencies . Some central banks consider CBDCs a potential future reserve asset class.