Related Content
Save
Point of View · 12.19.23
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
Survey: How Treasurers Are Positioning Cash with Possible 2024 Rate Volatility
Save
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
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.
Futures Contract
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.
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 .
Green Deposit
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.
Variable Net Asset Value Money Market
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.
Stable Net Asset Value Money Market Fund
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".
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.
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.
Contact Us
Interested in learning more about our expertise and how we can help?
IMPORTANT INFORMATION
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTI or its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTI or its affiliates’ efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTI or its affiliates. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult an NTI representative.
Forward-looking statements and assumptions are NTI or its affiliates’ current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing, and other services rendered to various proprietary and third-party investment products and firms that may be the subject of or become associated with the services described herein.
At Northern Trust Asset Management (NTAM), we define Sustainable Investing as encompassing all of NTAM’s investment strategies and accounts that utilize values based and norms based screens, best-in-class and Environmental, Social & Governance (ESG) integration, or thematic investing that may focus on a specific ESG issue such as climate risk. NTAM’s Sustainable Investing includes portfolios designed by NTAM as well as those portfolios managed to client-defined methodologies or screens. As the data, analytical models and aforementioned portfolio construction tools available in the marketplace have evolved over time, so too has NTAM. NTAM’s Sustainable Investing encompasses strategies and client assets managed in accordance with client specified responsible investing terms (historically referred to as Socially Responsible), as well as portfolios that leverage contemporary approaches and datasets, including ESG analytics and ESG thematic investing.
Environmental, Social and Governance (ESG) investing involves certain risks because the methodology of an underlying index selects and assigns weights to securities of issuers for nonfinancial reasons, a strategy may underperform the broader equity market or other strategies that do not utilize ESG criteria when selecting investments. The companies selected by an index provider as demonstrating ESG characteristics may not be the same companies selected by other index providers that use similar ESG screens. In addition, companies selected by an index provider may not exhibit positive or favorable ESG characteristics. Regulatory changes or interpretations regarding the definitions and/or use of ESG criteria could have a material adverse effect on a strategy’s ability to invest in accordance with its investment policies and/or achieve its investment objective.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
Not FDIC insured | May lose value | No bank guarantee