Planning Liquidity in Times of Uncertainty

  • By Tom Hunt, CTP, and Mariam Lamech
  • Published: 7/18/2022
Dollar sign against futuristic background

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. The key findings are formed by the nearly 300 treasury practitioners who responded to the survey. Here is what we discovered …

Short-term investment allocation

In terms of bank deposits, we found that most organizations are currently maintaining 55% of their short-term investments in bank deposits, which is up just 3% over last year. Is it possible that this is due to the coronavirus pandemic? Absolutely, as companies have been focused on liquidity planning over the past two-plus years.

Bank relationships have been key for treasurers. This started in the spring of 2020, when interest rates dropped to zero and organizations needed to draw down on liquidity. With relatively high inflation in the U.S. came a rise in interest rates from the Federal Reserve — 75 basis points in June alone. What this equates with is low yields, which provide little appetite for companies to move away from bank deposits.

Where are the majority of organizations allocating their short-term investment balances? An average of 81% are designating them to safe and liquid investment vehicles that include bank deposits, money market funds (MMFs) and U.S. Treasury securities. This is the highest figure on record since AFP began tracking the data. In fact, according to 93% of our respondents, the number one driver for deciding where to place deposits is their relationship with their banking partners.

Preparing portfolios ahead of anticipated rate increases

On March 16, 2022, the Federal Reserve indicated that the Federal Open Market Committee (FOMC) was increasing its target for the federal funds rate — the first time since 2018 — stating: “… [the] implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create upward pressure on inflation and weigh on economic activity.” In June, they increased the rate to 0.75, which is the highest increase since 1994. It is expected that the Fed will continue these increases until inflation slows, which economists fear might lead to a recession. 

How are organizations preparing for anticipated rate increases?

  • 57% are managing the duration of their portfolios.
  • 34% are shortening the duration.
  • 19% are reviewing positive real yields among permitted investments.
  • 16% are diversifying investments/asset classes within their policy.
  • 15% are monitoring credit spreads to capture value within their investment policy.
  • 7% are considering inflation protection securities and floating rate notes.

Anecdotal evidence suggests that treasurers will continue to maintain their bank deposits. However, at the same time, they are assessing their bank relationships to understand the increased market rates and how their earnings credit rate and deposit rate will benefit.

Safety is number one

Safety continues to be the most valued short-term investment objective for 63% of organizations, which is 1% higher than reported last year. This is not at all surprising given the uncertainty in the economy.

Environmental, social and governance (ESG) investments

The share of organizations considering ESG (environmental, social and governance) investment parameters increased to 25% according to this year’s survey. In comparison to last year, which was a reported 17%. This 8% increase is indicated as being a shift from the category of “unsure” responses.

Why did they shift from unsure to yes? One possible reason is an increase in ESG-focused money market funds. In an effort to encourage investment from institutional holders, these funds have been waiving their fees.

The top-yielding funds at the time of this writing, ESG money market funds are, by nature, prime funds, and hold a high percentage of financial institutions in their portfolio across different asset classes. Something to note is the fact that many MMFs have underlying investments that qualify as ESG, and are therefore now considered ESG-focused — even if their name hasn’t changed to reflect the focus.

Preparing for the end of LIBOR

The end of LIBOR is just around the corner: June 30, 2023. How prepared are organizations? Only 26% of respondents said their organizations have plans in place to prepare operating cash and investment portfolios for the end date. This is considerably higher than the 15% who reported likewise in last year’s survey. That said, it does appear that for financial professionals, the end of LIBOR is not high on their list of priorities. Rather, the focus is on helping their organizations maintain resiliency post-COVID.

Most companies are in a mode of discovery and understanding when it comes to the end of LIBOR. Perhaps as the deadline gets closer, more and more organizations will prepare for the transition, which may be indicated by an increased use of the Secured Overnight Financing Rate (SOFR) and the new global reference rates in the investment landscape. 

The period of uncertainty we are living through is likely to prevail for the foreseeable future. It is up business leaders to prepare their organizations to survive these challenging times with minimal disruption. In the face of our current economic and geopolitical challenges, and in the foreshadowing of things to come, safeguarding an organization’s cash and short-term investment portfolio is going to be imperative for treasury leaders.

Join AFP and our expert treasury panel for a look at the key survey results and current investment climate in the companion webinar, 2022 AFP Liquidity Survey: Short-Term Investing in Turbulent Times.

Want to know more about liquidity? AFP has you covered. Check out the 2022 AFP Liquidity Survey web page.

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