Survey: How Treasurers Are Positioning Cash with Possible 2024 Rate Volatility
Treasurers, likely seeking to diversify their cash holdings to navigate rate and market uncertainty, are looking to money market funds, short-term bonds and ESG funds among others.
- Cash Management
- Cash Insights
- Money Market Fund
- Portfolio Construction
Key Points
What it is
A survey of corporate treasurers uncovers how rising interest rates have impacted their cash investment decisions, and how they are positioning their portfolios.
Why it matters
Elevated interest rates are corporate treasurers’ top concern when making investment decisions on their short-term investments.
Where it's going
As treasurers look to diversify their cash, nearly 60% say they have invested in or plan to invest in short-term bonds or ultra-short bonds.
Over the past two years, investors have navigated significant volatility in short-term investments, driven in no small part by skyrocketing inflation and aggressive interest rate increases by central banks globally. As a result, cash managers such as corporate treasurers must keep careful watch over portfolio diversification, investment and regulatory changes. To better understand the challenges and opportunities that cash investors face amid this volatility, we partnered with the publication Treasury Management International to survey more than 200 corporate treasurers across global regions and industries. The survey covered a range of topics, including how this market has impacted their investment strategies and how they have positioned their portfolios for uncertainty ahead.
Among the findings in the survey, it’s likely no surprise — given the recent global rate-hike campaigns among central banks — that 41% of survey respondents picked rising interest rates as their number one concern impacting their short-term investment decisions while 15% selected inflation. Treasurers are understandably concerned about higher interest rates, with a focus on whether they will increase further and when they might start to taper off. But in the meantime, we think treasurers largely are seeking to benefit from elevated rates while still maintaining liquidity and protecting principal. We think it’s now getting to a point where central banks in the U.S., the eurozone and U.K. are closing in on the peaks of their policy rates , if not already there. And already, based on markets, investors are expecting rate cuts as early as March 2024. We think that’s too aggressive. While inflation is moderating, we think it is still too high relative to central banks’ targets. We don’t see central banks hurrying to cut rates any time soon.
What Cash Investors Can Do
So what should corporate treasurers and other cash investors do to make the most of this environment? Finding the answer to this question may particularly challenge less experienced treasurers who had become accustomed to low or even negative cash rates for more than a decade and are now making investment decisions in a rising rate environment for the first time in their careers. And we think more seasoned treasury professionals are discovering that the investment approaches that worked more than 10 years ago don’t necessarily suit the current environment.
There are some levers cash managers can pull to make the most of rates on the move, including duration, as shown in Exhibit 1. Uncertainty over interest rates and inflation likely requires caution by investors about how much duration they maintain in their portfolios. With shorter duration, treasurers can potentially better benefit from rate hikes as they come through, if they believe rates are still rising. Those who believe cuts are in the pipeline sooner rather than later likely will want to extend their duration. As such, we think it’s a careful balancing act between liquidity needs and positioning for a direction view on short-term rates.
Duration measures the sensitivity of a security or portfolio to changes in interest rates. It often is used as a measure of risk to interest rate moves for fixed income securities and funds.
A futures contract specifies the future exchange of an asset on a pre-determined delivery date in exchange for a payment at the time of delivery.
EXHIBIT 1: POSITIONING FOR RATES ON THE MOVE
Cash investors most commonly reduced duration likely in reaction to, or preparation for, rate hikes, based on the survey. With shorter duration, treasurers can potentially better benefit from rate hikes as they come through.
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Source: TMI and NTAM 2023 Global Treasury Survey, taken from April 2023 to June 2023, 217 respondents
Our survey may offer insight on options available to cash investors. In early 2023, during the banking crisis, we saw significant inflows into money market funds. While the impact of the banking crisis has calmed down, many corporate investors have opted to stay in money market funds.
Indeed, 73% of respondents said they have invested in or plan to invest in money market funds with value and 53% in those with (Exhibit 2). Ultra-short/short-term bond funds grew in popularity with investors’ search for yield. While 32% of treasurers surveyed were already invested in ultra-short or short-term funds, 26% more planned to invest in them. These instruments may interest treasurers more in particular if money market rates begin to fall.
Treasury teams also are paying more attention to sustainable investing. Of the respondents to the survey, 38% not already invested plan to invest in money market funds that conform to environmental, social and governance (ESG) standards and 42% intend to use .
Banks use green deposits to provide loans for projects to improve the environment. Those projects may be related to energy efficiency, renewable energy, clean transportation and waste management.
A stable net asset value (NAV) money market fund is managed toward the goal of maintaining principle, or to maximize the chance that an investors will receive $1 back for every $1 invested. If NAV falls below $1, it's called "breaking a buck".
Investors in variable net asset value (NAV) money market funds purchase or redeem units of a fund at a variable value. This is opposed to a stable NAV money market fund, where the investment manager aims to keep the purchase and redemption values the same.
EXHIBIT 2: WHERE CASH INVESTORS INVEST AND PLAN TO INVEST
In the coming year, treasurers are looking to invest in money market funds, short-term bonds, Treasurys, and sustainable/ESG bonds and deposits.
![industry weighting changes](https://images.northerntrust.com/content/dam/northerntrust/investment-management/global/en/images/web/insights/2023/point-of-view/how-treasurers-are-positioning-cash-2024-rate-volatility/b2-poll-current-invest.jpg)
Source: TMI and NTAM 2023 Global Treasury Survey, taken from April 2023 to June 2023, 217 respondents , MMF=money market funds, NAV = net asset value, ESG = environmental, social and governance
Managing Cash Amid Volatility with a Wider View
Even if inflation dies down in 2024, we think volatility and uncertainty around short-term interest rates likely will remain for a while, creating risk and opportunity for cash investors. As investors form views about the direction of interest rates, they can act on those views by adjusting duration of their portfolios. However, they can consider other options in their efforts to preserve capital and liquidity while potentially boosting yields, including and short-term bonds, money market funds, and sustainable investments.
Main Point
A Variety of Levers to Pull to Manage Cash in This Market
Among the findings in our survey, it’s likely no surprise that 41% of survey respondents picked rising interest rates as their number one concern impacting their short-term investment decisions while 15% selected inflation. There are some levers cash managers have been able pull to manage their portfolios, including increasing or decreasing the duration of their cash investments. However, they can consider other cash investment options — including ultra-short, money market and ESG funds — in their efforts to preserve capital and liquidity while potentially boosting yields. For more insights on managing your cash portfolio, explore the full survey in the link below.
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