Pulse Check: Why Are Corporates More Focused on Liquidity?

If you have an interest in treasury finance, chances are you have asked questions like, “how did they not see that?” or, “of course I wouldn’t have been in that situation,” when events happen in the market. It’s likely you’ve also said to yourself, “how did they know that?” or, “it had to just be dumb luck.”

These questions can leave you shaking your head, especially when you’re evaluating whether or not your investment strategy is effective. You are not alone.

Throughout my career I have been exposed to hundreds of treasury departments. Here, I’m sharing insights I have learned and the most recent pulse check across treasury today.

THERE IS NEVER A “PERFECT TIME”

In a discussion I had with a major player in treasury who has led large trends, he said, “Teams need to be open. There are lots of opportunities to maximize yields. It is important to be active and keep your eyes on what is happening and consider how that may be an impact.”

For sophisticated teams, their success has been attributed to staying active year-round. This includes regularly inspecting their investment policies, hosting discussions with treasury peers, and staying in touch with the street. Working to have a robust understanding and working to expand options, including expanding compliance policies, is a way to make treasury teams successful.

I have heard many treasury teams infer that there is never a perfect time to implement new processes and technologies, conduct changes to a policy, or change a structure: the overall sentiment is that “now is better than never.” We are in a lower yielding and de-risking state, which is a perfect time to stay active and set your team up for success.

WHAT ARE WE SEEING IN THE MARKET?

We saw a lot of change in 2019. Given the effects of tax reform, repatriation, and a changing interest rate environment, treasury departments have been forced to make investment decisions. Decisions have been made to invest typical investment balances back into the business, pay off debt, share buy backs, declare dividends, and other shareholder-driven activities. In order to accommodate this, treasury teams have shortened duration, chosen higher grade investments, and focused on liquidity.

Those of us who work in treasury can get overly focused on executing treasury operation demands and lose sight of the overall business. That is until business operations or shareholder events take place that require investments and cash to be moved. Typically, these things happen fast and require rapid change from treasury teams, which requires significant cross-team collaboration. This is a big reason why we are seeing major investments in technology to help with forecasting, management, and reporting. Teams are focusing on automating and streamlining to free their time to be more involved in the strategy rather than being more of a byproduct.

FLIGHT TO QUALITY

Impressively, most treasury teams have timed recent markets quite well. Perhaps this includes some hangover from 2009, but in general, teams are more aware of the investment landscape and are much more proactive.

Treasury teams have concerns with four major events looking at the road ahead. These events all combined to create a better risk/reward trade off for shorter-term investment strategies:

• Inverted and flat yield curve environments have reduced investor appetite for longer dated securities.
• As yields decline, the dollar value of each basis point becomes more valuable, resulting in increased price volatility for smaller changes in yield.
• Continued unprecedented central bank intervention worldwide is driving prices higher across asset classes and reducing the additional spread earned for risk to unpalatable levels.
• Headline news events (e.g., impeachment, Brexit, trade wars, election, etc.) creating even more volatility.

Given these concerns, we have seen a reduction in duration across the board as well as increased focus on credit rating profiles. Teams are utilizing banking relationship deposits, yielding demand deposit accounts, government money market funds, and other cash equivalent type structures. However, we are also seeing further diversification in the short end of the curve with a higher allocation to prime MMFs. This shows that treasury teams are finding additional ways to capture yield without taking on considerable risks. Just in 2019 alone, we saw an 180% increase in prime MMF balances. In most cases teams have captured 20-60 basis points in additional yield with allocations to prime MMFs.

POSITIONING TO JUMP WHEN CASH CAN BE ADVANTAGEOUSLY DEPLOYED

Looking ahead, it seems like many of these disrupting forces have staying power. The U.S. Federal Reserve only seems more determined to keep rates lower longer, and many economically disrupting events (trade disruptions, U.S. presidential stability, European economic climate) have room to run. Moreover, the current U.S. economic expansion is long in the tooth at a time when government, corporate, and consumer debt levels continue to increase. These economic and market challenges create volatility and therefore investment opportunities.

Treasury teams know there will be opportunities — they just don’t know when or if the benefits will outweigh the risks. This reinforces into the old adage that folks within treasury get a pat on the back for picking up additional yield but get fired for losing any. However, teams are holding internal discussions and review that will allow them to move when the value is there. Evaluating benchmarks, investment policies, and structures are all in focus and changes are being made.

WHAT ARE YOU PREPARING FOR?

Whether it is a re-emergence of inflation, a sell-off in the markets, structuring opportunistic cash for M&A, capital investments, or padding for other speculations, it is critical to structure portfolios accordingly.

Teams are working hard to gather as many insights and details as possible for informed investment decisions. Historical analysis is a good baseline but is not good enough for the more sophisticated teams. Longer term operations forecasts are being paired with situational analysis to help optimize strategies. Understanding yields based on a range of balances, changes in rates, asset allocation changes, and even the impacts of new asset classes. These are not easy things to do but with the right tools and processes there has never been more confidence in how structures are being configured.

This material is for informational purposes only. The information we provide is from sources Clearwater Analytics considers reliable, but Clearwater Analytics provides no warranties regarding the accuracy of the information. Further, nothing herein should be construed as legal, financial, or tax advice, and any questions regarding the intended recipient’s individual circumstances should be addressed to that recipient’s lawyer and/or accountant.