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Tips For The Cautious Cash Investor

2 min read

Executive Summary

As risk averse cash investors slowly move away from an aggressively conservative strategy, we take a look at two developing trends that investors may be considering and some potential pitfalls.
Emerging Trends:

  • Bank Deposit Accounts
  • Prime Money Market Funds

We think that the credit market has probably exited the free-fall phase and has entered a phase of combating a recessionary economy. Investors must be mindful of some of the emerging cash management trends that represent giant leaps, rather than baby steps, back into credit risks. As we emphasized in previous communications, investments in government-backed debt, supplemented by strong individual credits appropriate for one’s risk tolerance still offer better principal protection than some other options.

Introduction

Despite prolonged challenges to global economies, the fantastic collapse that began more than a year ago in the short-term credit market is showing definitive signs of improvement. Lower inter-bank lending rates, reduced use of the Federal Reserve emergency facilities, and increased money flows into prime money funds all seem to indicate that credit trends may have turned a critical corner. However, since the Federal Reserve’s zero interest rate policy (ZIRP) came into effect last December we’ve seen two emerging strategies of cash management that appear to be getting ahead of our “cautiously optimistic” strategic outlook. One such practice involves small operating banks stepping up efforts to woo corporate clients into bank deposit accounts and the other is the gathering movement of cash away from treasury money market funds and into “prime” funds.
In light of such developing trends, risk averse corporate treasurers and CFOs must ask – Are bank deposits safe in today’s environment? Are prime funds ready for prime time? Are there places where cash managers can park their cash and still get a good night’s sleep?
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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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