Can Businesses Get Any Yield on Their Cash?

Yields on safe, liquid investments can’t get much lower without being negative, and the current Federal Reserve policy keeping them there appears likely to continue.  Of course, adjusted for inflation, yields already are negative.  All the more reason to survey the money and shorter term capital markets for ways to earn interest without undue risk.

Traditionally, corporate treasurers chiefly have relied upon bank deposits and money market funds for corporate cash management.  Yields now range between 0 and 0.19%. Money market funds’principal attraction, a constant $1 per share Net Asset Value (NAV), is widely expected to change soon by SEC regulation, making the NAV variable.  This will force investors to look at a money fund’s management and total return, and not just yield, more closely.  It also may prompt them to consider slightly longer maturity funds, so-called “ultra short” bond funds, with yields now in the 0.70% range.  Senior bank loan funds, featuring floating rate yields varying with a spread above LIBOR are also now getting attention.  Depending on quality, their yields are 2 to 5%.  These have the virtue of adjusting yields upward if LIBOR rises, but may see NAVs vary more than ultra short bond funds.  They are best used during periods of the credit cycle when default rates remain low, as is the case currently.

According to Fed data, corporate cash has built to a near record $1.7 trillion.  Many companies are not adding to headcount, nor are they seeing attractive potential capital expenditures, and so are allowing cash to accumulate for possible strategic acquisitions and as a hedge against uncertainty generally, rather than use it to pay down debt completely or pay it out to shareholders.  In this environment, it becomes realistic for corporate treasurers to keep cash on the balance sheet for more extended periods than before, and so it can be prudent for them to use slightly longer term investments with better yields to manage cash.  The key factor in successfully managing cash using fund vehicles that take a bit more risk than money market funds is a thorough understanding of the instruments the funds hold, and the manager’s strategy and track record.

Studies have shown that companies want “safe, short-term and simple” investments.  Our experience is consistent with that.  Moreover, when the corporate cash investor is an insurance company or other financial institution, regulatory and rating agency guidelines must be considered in managing cash.

As zero interest rates give way to a gradual rise, market participants expect the effects to be felt sharply throughout the markets.  For those responsible for managing corporate cash, it will be important to have a strategy in place that not only produces better yields now, but that shields the investments from losses when rates begin to rise.

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