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Treasurers are seeking the slightest pickup in returns on their short-term cash, provided the risk falls within corporate investment guidelines.
Vincent Ryan, CFO Magazine
June 15, 2012
During an April press conference, Federal Reserve chairman Ben Bernanke said U.S. monetary policy was in the right place — no tinkering needed. While that may have come as good news for the financial markets, the Fed's commitment to near-zero interest rates continues to be a thorn in the side of treasurers and CFOs.
What's their problem? They don't know where to invest the cash that has piled up on their balance sheets. Traditionally safe investments are providing virtually no real yield. CFOs and treasurers "are in the most difficult place they've been in their careers," says Paul Montaquila, vice president of fixed income at Bank of the West. "Treasury rates are paltry, and agencies offer only a bit of a pickup [in yield]."
But some companies have begun to loosen their typically conservative attitudes toward liquidity management, says Montaquila. Instead of keeping to 30-to-60-day thresholds for short-term cash, now they're willing to go out nine months to a year on a term certificate of deposit, he says. "With Treasury bills trading at 20 basis points, a 50-to-60 basis point return [on a term CD] is absolutely worth it," he says. Since the Fed is sticking to its guns on interest rates until at least late 2014, such CDs don't expose a firm to much maturity risk.
In general, treasurers are slightly more willing to take on a reasonable amount of risk if they stand to get paid for it, says Montaquila. As proof, he points to last March, when the two-year Treasury bill was trading at a "whopping" 37 basis points. "Buyers rejoiced and gobbled it up," he says. "At the right levels, companies will extend out on the curve."
But most quality investments within the risk parameters of cash managers are still not compensating investors enough. While some have touted nonfinancial corporate bonds, for example, as a safe place to stash cash, the sector is expensive right now, Montaquila says. And while the bonds of financial-services firms may offer a treasurer a 100-to-200 basis point pickup, many banks have been downgraded so often that they fall outside the limits of allowable risk.
There is a clock ticking for some companies, though. First, many treasurers have been keeping cash stashed in non-interest-bearing bank accounts. These accounts have been an attractive parking spot because of a temporary guarantee from the Federal Deposit Insurance Corp. But, barring congressional action, FDIC insurance coverage on these accounts will cease at the end of 2012.
Second, proposed new regulations for the money-market-fund industry have cash managers wondering if investing through these vehicles makes sense anymore. A survey by Treasury Strategies suggests that if the Securities and Exchange Commission enacts regulation that affects returns, treasurers would consider moving money into separately managed accounts, government securities, bank money-market savings accounts, CDs, and commercial paper. As a result of the FDIC coverage and money-fund regulation developments, "entities will have to take those funds and place them somewhere," says Montaquila.