Weighing Your Next Move

Rock-bottom interest rates and new regulation call for a reexamination of short-term cash investments.

Ken Grogan, manager of treasury services at Wakefern Food Corp., a cooperative of companies that own and operate ShopRite supermarkets, says Wakefern’s money-market investments are highly diversified, both among fund types and fund families. “Look at what happened with the Reserve Primary Fund,” Grogan notes. “When the Primary Fund broke the buck [dropped below $1 per share], there was a run on the Reserve U.S. Government Fund and it became illiquid.”

Performance outliers among money funds also deserve a close look, says William Dombek, a managing director in The Bank of New York Mellon’s financial markets and treasury services division. If a fund is outperforming the market by 10 or more basis points, says Dombek, “that’s a negative. There is a perception they are pushing the envelope for risk.”

At the same time, the SEC’s new 2a-7 rules potentially make money markets less rewarding. For example, money funds now have to hold 10% of their portfolio in instruments maturing overnight and, beginning later this month, 30% in investments maturing within seven days. Requirements like that could cost the average prime money fund 12 to 15 basis points in yield when the investment environment returns to more-historical rates. In other words, investors won’t earn the same spread over Treasuries as in the past, Pan says. “The rules will bolster liquidity and strengthen stability, but will come with a lower yield,” says Clearwater’s Clay.

Given that possibility, treasurers may have to run just to stay in place. That’s causing renewed interest in other investment vehicles. For the last year, finance departments “were not interested in hearing anything we had to say about anything even remotely pressing the envelope of risk,” Dombek says. “They were confident being judged by their liquidity and risk profiles.”

Tired of earning nothing, however, some finance departments are raising the yield question once again. “Treasurers are still carefully evaluating things from a risk perspective, but they are starting to say, ‘Let’s do the math,’” Dombek says.

Below are some vehicles and strategies that CFOs could consider:

Going Long

“Until we see some rise in the short end of the curve, it’s probably not wise to buy even a 6- or 12-month CD,” says Jeff Flynn, director of the Institute of Public Investment Management. “You’d be locking in the lowest yields we’ve ever seen.”

But to pick up basis points, some companies are venturing at least a little further out. Clients that hold reserve balances on their corporate bonds at BNY Mellon, for example, are structuring portfolios that have a duration longer than 30 days. “They are reaching for duration, but it’s from a total portfolio view,” says Dombek.

The new rule requiring money-market funds to keep a weighted average maturity of 60 days or less will slacken demand for longer-dated securities, possibly resulting in a steeper yield curve, Pan says. So a government agency discount note that matures later than 60 days could soon provide a better return.

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