Liquidity, Liquidity, Liquidity…

As goes the real estate mantra, “location, location, location”, so liquidity is paramount to corporate treasurers. It’s etched predominately as a primary objective into almost every cash investment policy that we’ve ever reviewed. So, with the Fed’s latest round of quantitative easing set to wind up in just 45 days, all eyes were on Chairperson Janet Yellen’s recent speech in Jackson Hole for clues as to when and how liquidity will be drained from the national balance sheet. The data-dependent nature of the question of “when” begs a review of employment trends in relation to Fed expectations, but to us, any prediction regarding the timing of Fed interest rate hikes is secondary to the inevitable impact that those hikes will have on market liquidity. The last cycle of Fed tightening occurred over a decade ago and much has changed within the regulatory and monetary environment with respect to liquidity in the years since then. The Fed has developed new tools to remove liquidity from its coffers and a host of new banking regulations are likely to tighten secondary market liquidity as well as the supply of securities. This change to the liquidity backdrop requires one to refresh one’s assumptions and to understand how these changes may impact liquidity objectives. We explore this subject in more detail in this month’s research which investigates the factors that have changed the liquidity equilibrium and in which we suggest steps that corporate treasurers can take to adjust to the coming environment.

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Best Regards,

Ben Campbell
President & CEO