Safety continues to be the most valued short-term investment objective for organizations, according to the 2022 AFP Liquidity Survey, underwritten by Invesco. During the companion webinar to the survey, an expert panel from Crane Data, Gilbane Building Company, Invesco and Workiva discussed planning liquidity in times of uncertainty, touching on bank relationships, ESG (environmental, social and governance) investment parameters, and what the Fed might do for future rate increases. 

Importance of bank relationships for short-term investments 

AFP’s survey found that a typical organization currently maintains 55% of its short-term investments in bank deposits, which is up from previous years. When investing in bank deposits, interest-bearing checking accounts and time deposits are popular instruments. 

Relationships are key when working with banks. Overall relationship with the bank is the overwhelming main driver in determining which banks to use when investing in bank deposits, followed by the credit quality of the bank, according to the survey. 

Among those polled in the webinar audience, when asked if they are asking their bank for an increased earnings credit rate (ECR), the majority said they are actively working with their banks for better results. 

John Paris, CTP, senior treasury manager at Gilbane Building Company, noticed a sizeable jump in what his company got from ECR. Meanwhile, Hui Chen, CPA, CTP, director of treasury at Workiva Inc., found that it depends on the bank, as some adjust ECR automatically, while others do it when asked. 

Relatively few short-term investment vehicles 

AFP’s survey found that companies maintain their short-term investments in relatively few vehicles — on average, 2.5 vehicles, a figure that has remained unchanged since 2021. 

When polled on whether they are looking to expand investment vehicles, 35% of webinar audience participants said “maybe.” Paris explained that for his company, rather than expanding vehicles, it is looking at expanding its horizons, including geographic limitations, industry sectors and types of securities within the portfolio. 

Main drivers for selection of money market funds 

“Money market mutual funds have come back to the $5 trillion level,” Peter Crane, president of Crane Data, said, citing data from the U.S. Securities and Exchange Commission (SEC) and his company, Crane Data. He explained that while money funds have been gaining assets over the last couple months, the strongest seasonal period of the year is approaching. 

Within money funds, $4 trillion is now government and treasury. Institutional assets drive money fund assets at 70%, and half of the institutional total is comprised of trading portals and platforms. 

Something to keep an eye out for this year is SEC’s final rule(s) on money market fund reform. Last December, the SEC released a proposal to reform money market funds, and currently, the SEC is reading through comments which were filed through April. 

When it comes to drivers that play a role in the selection of money market funds, AFP’s survey found that yield rose to the top as the primary driver, followed by fund ratings, then fixed or floating NAV. 

Chen and Paris both noted that their companies’ investment policies already factor in considerations such as security and liquidity in determining the types of funds they can invest in. As a result, yield becomes a key factor when selecting a fund to invest in. 

ESG investment parameters have also become more of a consideration when managing operating cash. Up from previous years, 25% of survey respondents said they consider ESG. One possible reason for the shift is an increase in ESG-focused money market funds; many of these funds have been waiving their fees to encourage investment from institutional holders. In addition, ESG money funds are Prime funds in nature and hold a high percentage of financial institutions in their portfolio across different asset classes. 

One trend that Crane anticipates will grow in the money funds space is a push toward government funds that are doing social investment through minority dealers. 

The 2022 AFP Liquidity Survey, underwritten by Invesco, aims to understand current and emerging trends in organizations’ cash and short-term investment holdings, investment policies and strategies in the current economic environment. See the comprehensive results here.

More Rate Increases 

Many wonder what the Fed is going to do in response to record-high inflation. “So as the inflation debate continues, employment remains quite strong, yet growth is slowing, and it’s a tough environment for central banks,” Laurie Brignac, CTA, CIO and head of global liquidity at Invesco, said. “But they’ve been consistent. They are going to fight inflation. They are going to continue to tighten until they see inflation waning.” 

For treasury professionals, the question becomes, where are you invested? “As a money fund manager, when we look at what we have access to — and you saw all the money from prime money market funds transition to government — we buy treasury agencies and repos that are backed by treasury agencies,” Brignac said. 

However, one trend Brignac has noticed is that dealers prefer to have lower repo books. “Since the financial crisis, dealers have been encouraged to shrink their balance sheet, not rely on repos in the front end of the curve for their financing,” Brignac said. 

Brignac also gave a reminder that monetary policy has a lag in effect of around 18 months. “So, what they’re doing today doesn’t have an impact today,” Brignac said. “It’s going to come down the pike.”  

Looking ahead, Brignac expects the Fed to be active and move at every meeting. She warned that treasury professionals should be prepared for more volatility. 

Turning to historical precedent, Brignac explained, “The last time the Fed raised rates this fast was back in ’94, and five months after the last hike, they did have to ease, so there could be a fairly quick pivot.” 

There is good news on the horizon. The Treasury gave its estimates for the rest of the year, and we can expect to see bill issuance increase, providing relief.