Safe Haven Investing: New Challenges

The ground shook under Washington twice in August, registering 5.8 on the Richter scale and AA+ on the ratings scale. Mother Nature produced the earthquake and Congress, unable to craft a fiscal plan meaningful enough to maintain America’s AAA rating, triggered the ratings tremor. Aftershocks included a string of poor economic data suggesting the current elevated level of unemployment will persist. All combined, this news sparked a level of market volatility that we’ve not seen since the ’08 credit crisis.

The government’s cost of funds unexpectedly and significantly dropped across the curve as the markets digested the ratings downgrade from AAA to AA+. Ironically, the shift to AA+ ignited a flight to quality into the same securities that had been downgraded and this shift also was the source for one of the lowest yield environments ever to challenge treasurers. As investors sought “safe havens,” many short-maturity securities and money fund yields fell to zero and a flood of money poured into federally-insured bank transaction DDAs. The inflow of cash also spurred some major banks to pass along FDIC charges to their depositors in exchange for accepting “extraordinary deposits,” which formally introduced the concept of negative yield to many treasurers.

Surviving a zero to negative yield environment presents challenges to the corporate cash world that many treasurers never considered. Assuming that the prospect of stashing cash under the mattress remains impractical for corporate treasurers, this month’s research discusses the negative yield environment and the various strategies to maintain liquidity, positive returns and appropriate risk control during this earthshaking, and unprecedented, time.

Best Regards,

Ben Campbell
President & CEO