Stubbornly low short-term interest rates have encouraged some corporate treasurers to reach for more yield by moving to longer-term investments or those with slightly lower credit quality. But the prevailing mode still seems to be caution, according to bankers and investment managers, with treasury teams putting a premium on safety rather than yield.

To the extent that companies have invested farther out the curve, they're likely to unwind those investments before short-term rates begin to rise.

The extent of the caution among corporate treasuries is evident in the Association for Financial Professionals' 2013 Liquidity Survey, released in July, which showed 50% of companies' cash is in bank deposits, up from 25% in 2008.

“What we continue to see is a strong emphasis and desire to leave cash on deposit,” said Fred Berretta, head of the global liquidity investment solutions team at Bank of America Merrill Lynch. “If you look at the last five years, as rates shifted, the deposit option has really become and remained the most attractive short-term liquidity vehicle in the market.”

Companies that invest in short-term securities have “a strong and continuing emphasis on Treasuries,” Berretta said, but noted that the partial government shutdown in October caused some companies to shift out of T-bills into deposits or money funds.

Some more sophisticated companies, those with capital that they know they won't need to access immediately, have shown more comfort in investments “with a tenor of three months, six months, nine months, a year,” Berretta said. He also noted interest in separately managed accounts, portfolios that are managed for a single company. “It's one way to eke out slightly greater yields, but to do that in a prudent manner,” he said.

But corporate treasurers still face three major sources of uncertainty when it comes to short-term investing: the outlook for Fed policy, the outlook for the economy, and the Securities and Exchange Commission's proposed regulations for money-market funds, Berretta said. “That's a wild card, because the money fund is an incredibly popular vehicle for many of these investors. Once that's off the table, you are going to see some evolution in the way these working capital investors behave.”

Brandon Semilof, a managing director at StoneCastle Partners, an asset management company, said that while safety remains important, “I think that people are somewhat frustrated by the fact that we've been in a zero percent interest-rate environment for five years.”

Semilof said that over the past couple of years, treasurers have tried to do a better job of dividing their cash between what they need to have immediate access to and what can be invested with a slightly longer time horizon.

“There's a cost to having 100% of your cash liquid on a daily basis,” Semilof said. “Treasurers are becoming more aware that you can really take that time and create multiple buckets that will allow you to invest that cash in a way that's going to enhance the return.”

Tom Nelson, chief investment officer at Reich & Tang, which provides institutional money funds and other liquidity solutions, also noted more corporate treasurers “extending maturity, wanting to achieve some yield.”

But once short-term rates start to rise, “everything that's happened in last 12 to 24 months will reverse,” Nelson said. “People are going to start to get more cautious, put more money into short-term vehicles, and wait for rates to reset back to a more normalized level.

“While money funds and other kinds of pooled products will ratchet up more slowly than direct investments, I think they'll become much more attractive from the perspective that people who do tend to extend out and buy longer instruments are going to see some price depreciation,” he said.

That rise in rates isn't likely any time soon. “I wouldn't be surprised if we're looking at 2016 before the Fed does something in terms of the fed funds rate,” Nelson said, but added: “My expectation is that when rates do start to rise, they're going to rise quicker than people expect. In that environment, it really becomes a question of how short can you keep your money.”

When investors believe rates are going to rise, “you would typically see an interest in shortening your duration profile,” Berretta agreed. “Investors with long-term investments might let those investments roll off. Once rates make a move, they can get back in the market and capture the higher rate, once issuance comes at that rate,” he said.

Julian Oldale, head of international cash management origination for North America at RBS, also sees companies focused on capital preservation rather than yield. “There is a lot of caution out there,” he said. “People, especially in the treasury area, are tasked with preserving what are exceptionally large amounts of liquidity at the moment. I don't think there's a push to get more yield on that. It's about preserving their capital.

Oldale cited customer interest in account-based solutions. “Banks are building fully liquid solutions that recognize term and the regulatory changes on treatment of cash balances through account-based solutions,” he said. “There is instant liquidity across these accounts, but if a client keeps the funds for a one-month period, they'll get a one-month rate; if it's three months, they'll get a three-month rate. If they pull the funds out earlier, for any reason, they'll get the fed funds rate.”

Oldale said such solutions fit companies' focus on safety and also position them for the point at which short-term rates head higher. “They're ticking their counterparty risk box, they're ticking their capital preservation box, and it will give them a level of yield that will recognize rate rises as they come through,” he said.

Dave Robertson, a partner at Treasury Strategies, said banks are coming out with new deposit products that offer higher yields to customers that provide them with stable deposits in an attempt to meet tougher liquidity requirements under Basel III and other regulations.

“What we're seeing are products where the banks share that liquidity risk [and they say to customers]: 'If you're willing to provide stability, we'll give you a premium,'” Robertson said. He noted that the arrangement also works from the customer's perspective. “Corporates want the best yield with the most flexibility. Banks are trying to give them this.”

Instant Insights /

Balancing Safety and Return

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