From the December-January 2011 issue of Treasury & Risk magazine

Meager Cash Returns Prompt More Investing in Prime Funds

Corporate treasuries are increasingly investing their mountains of cash in prime money market funds, in a sign that the extreme caution that characterized companies' short-term investing in the wake of the financial crisis is giving way to a renewed search for higher yields.

In a recent survey of finance executives at more than 60 U.S. companies conducted by Treasury Curve, a platform for institutional money market investing, 69% say that in 2010, they put cash into prime funds, which invest in short-term corporate securities. Even if prime funds are rated Triple-A, they're viewed as riskier than government-backed securities. In 2009, the first year of Treasury Curve's survey, just 49% invested in prime funds.

Meanwhile, 77% say they invested in 2010 in governments, such as agency securities or funds holding agency securities, little changed from 79% in 2009, while 77% invested in Treasury paper or funds, vs. 78% in 2009. More than 60% of respondents represented corporate treasuries, and the rest state or local governments and financial institutions.

"More prime investing is definitely a trend I'm hearing from my treasury peers," says Brian King, assistant treasurer at Hitachi Data Systems, a Santa Clara, Calif.-based data storage provider with $3 billion in revenue.

Institutional investors grew wary of money market funds after the Reserve Primary fund's share price fell below $1 in September 2008 in the wake of Lehman's collapse, spotlighting the lack of transparency provided by most money market funds.

King, a survey respondent, says the concern about funds' holdings has abated as institutional investors demanded more information from funds. Increased regulatory scrutiny has also helped.

Plus, companies are seeing meager returns on cash they have invested in government bonds, prompting them to look elsewhere for at least a portion of their portfolios. Banks had been offering corporate customers attractive earnings credit rates to encourage deposits, but those earnings credits have come down or disappeared altogether, leaving prime funds among the few remaining ways to capture additional return.

Aron Chazen, managing director of Treasury Curve, says survey respondents increasingly are opting for the funds that best meet their investment needs, rather than simply tapping their relationship bank. One indication: 42% of respondents opted for non-bank asset managers in 2010, compared with 40% the year before.


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