Some treasurers are looking for the slightest pickup in returns on their short-term cash, provided the risk falls within corporate investment policies.
This week, Federal Reserve chairman Ben Bernanke said that U.S. monetary policy was in the right place — in other words, no tinkering needed. While that may be good news for the financial markets, the central bank’s long 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, they’re not earning any real yield in traditionally safe investments, and they’re starting to get antsy.
CFOs and treasurers “are in the most difficult place they have been in their careers,” says Paul Montaquila, vice president of fixed income at Bank of the West. “Treasury rates are paltry, and agencies only offer a bit of a pick-up [in yield]. A lot of these [companies] are super, super risk-averse, so they’re scared to do anything out of that realm.”
But the patience of treasury departments may be wearing thin. Montaquila says there has been a slight loosening of the extremely conservative attitude toward liquidity management. “In 2010, people were willing to get negative returns on Treasuries, just so the money was safe,” says Montaquila. But now companies are starting to take on a little more risk. “Maybe that’s a sign of things getting better domestically,” he says.
As one example, Bank of the West’s fixed-income group has convinced some CFOs to go back to their investment committees and get them to stretch the companies’ investment policies to accommodate longer maturities. While many companies have 30-day to 60-day thresholds on short-term cash, now they’re willing to go out nine months to a year on a term certificate of deposit, says Montaquila. “With Treasury bills trading at 20 basis points, a 50 basis point to 60 basis point return [on a term CD] is absolutely worth it,” he says.
With the Federal Reserve clearly sticking to its guns on interest rates until at least late 2014, such CDs don’t expose a company 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.” (The yield on the two-year T-bill is back down to 26 basis points.)
But most quality investments that are within the risk parameters of corporate cash mangers are still not compensating investors enough. While some nonfinancial corporate bonds, for example, have been touted as a safe place to stash cash, the sector is expensive right now, Montaquila says. “A lot of household names are super overbought,” he says. And while the bonds of financial-services companies 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, however. For one, many treasurers have been keeping cash stashed in non-interest-bearing bank accounts. These transaction accounts have been a particularly attractive parking spot because of the 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, new regulations for the money-market-fund industry being weighed by the Securities and Exchange Commission have corporate cash managers wondering whether investing through these vehicles makes sense anymore. If more regulation is enacted, according to a survey by Treasury Strategies, and returns are affected, corporate treasurers would consider moving assets 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. “Maybe by the end of the year the European scenario will not be quite as hot and the appetite for risk will increase more.”
Still, as he points out, short-term cash investing is about preservation of capital. “It’s not the return on your money,” says Montaquila, “it’s the return of your money.”