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Looking Beyond Bank Deposits and Money Market Funds

1 min read

Abstract

Greater vigilance is required of today’s treasury investment professionals. Neither bank deposits nor money market funds may be appropriate in the post-crisis, post-regulatory environment. As yields start to rise, cash investment strategy decisions that may have been delayed will require serious consideration. Direct purchases in separately managed accounts may become the primary alternative cash strategy. A framework of stratifying one’s cash balances by liquidity objective is discussed.

Introduction

Remember Broadhollow Funding and Ottimo Funding? Eight years ago this month, credit woes at the two subprime-tainted commercial paper issuers marked the beginning of the turmoil that fundamentally changed the financial world. As the economy improves and interest rates move higher, treasury investment professionals may be expecting the good old days of decent yields in safe investments, but a new and different world awaits us.
Today’s cash investment landscape is shaped by higher risk awareness, better understanding of liquidity costs and stricter systemic regulation that requires new thinking in corporate cash investment strategies. Interest rate changes may be cyclical, but bank and money market fund regulations are likely to leave a long lasting structural impact. Taking the longer view, the sensible treasury investment manager may need to look beyond current practices for other cash investment alternatives.
In this commentary, we reintroduce some of our thoughts on cash investment strategies with the understanding that bank deposits and money market funds alone may no longer be sufficient cash management tools after new regulations are fully implemented.
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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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