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

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

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

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

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

Some more sophisticated companies, those with capital that theyknow they won't need to access immediately, have shown more comfortin investments “with a tenor of three months, six months, ninemonths, a year,” Berretta said. He also noted interest in separately managed accounts, portfolios that are managed for asingle 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 ofuncertainty when it comes to short-term investing: the outlook forFed policy, the outlook for the economy, and the Securities andExchange Commission's proposed regulations for money-market funds, Berretta said.“That's a wild card, because the money fund is an incrediblypopular vehicle for many of these investors. Once that's off thetable, you are going to see some evolution in the way these workingcapital investors behave.”

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

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

“There's a cost to having 100% of your cash liquid on a dailybasis,” Semilof said. “Treasurers are becoming more aware that youcan really take that time and create multiple buckets that willallow you to invest that cash in a way that's going to enhance thereturn.”

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

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

“While money funds and other kinds of pooled products willratchet up more slowly than direct investments, I think they'llbecome much more attractive from the perspective that people who dotend to extend out and buy longer instruments are going to see someprice depreciation,” he said.

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

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

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

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

Oldale said such solutions fit companies' focus on safety andalso position them for the point at which short-term rates headhigher. “They're ticking their counterparty risk box, they'reticking their capital preservation box, and it will give them alevel of yield that will recognize rate rises as they comethrough,” he said.

Dave Robertson, a partner at Treasury Strategies, said banks arecoming out with new deposit products that offer higher yields tocustomers that provide them with stable deposits in an attempt tomeet tougher liquidity requirements under Basel III and otherregulations.

“What we're seeing are products where the banks share thatliquidity risk [and they say to customers]: 'If you're willing toprovide stability, we'll give you a premium,'” Robertson said. Henoted that the arrangement also works from the customer'sperspective. “Corporates want the best yield with the mostflexibility. Banks are trying to give them this.”