Treasury Today Country Profiles in association with Citi

When to invest

After the shock of the financial crisis investors were quick to pull their money out of what they perceived as risky investments. The retreat from higher risk areas of the market, however, required a significant sacrifice on yield. Despite the market showing signs of recovery, corporate investors are returning slowly, still fearing further turbulence. So, when is the right time to invest with yield at the forefront of strategy or will safety remain the order of the day?

Market at the moment

In the aftermath of the financial crisis, investors flocked to low yielding investments that had little or no risk associated with them. The most obvious choice for many investors was sovereign securities and bonds, as a result of dramatic shifts in investment policy in response to the panic of financial managers and boards fearing corporate cash would be lost in risky asset classes. However as recovery is more certain, some corporates are putting yield, rather than cash preservation, to the top of the agenda.

Market trends are developing differently between the US and Europe. In the immediate aftermath of the crisis, in the US, assets were initially put into government securities, but as confidence has risen there has been a shift towards prime money market funds. Joe Sarbinowski, Managing Director, Deutsche Asset Management, Deutsche Bank explains, “I think this is happening as an acknowledgement that we are not going to fall off the cliff, post-Lehman and post the Reserve Fund breaking the buck.

As governments around the world have provided stimulus to keep the economies going we are starting to see their impact. Certainly the world hasn’t returned to the heyday of 2007, but going forward there is a rosier picture which is instilling confidence that corporates can put at least some of their cash to work.”

One of the elements that has drawn corporates to money funds is the now more conservative attitude towards them, reinforced by amendments to regulations and in particular, the SEC’s rule 2a-7 which governs money market funds (MMFs) in the US. The new additions to rule 2a-7 in January 2010, state that funds should be more liquid and hold higher-quality assets, be weighted to a 60 day average maturity, (down from 90 days), and have a weighted average life of 120 days or less. Funds will now also have to disclose the value of their assets per share on a monthly basis.

Rule 2a-7

Rule 2a-7 of the Investment Company Act 1940 was introduced to define and regulate money market funds in the United States in 1983. It has been amended several times as new financial instruments have been introduced and in response to losses and difficulties experienced by some funds. US legislators have implemented amendments following the failure of the Reserve fund in the wake of the bankruptcy of Lehman Brothers in September 2008.

Money market funds are now required to maintain a daily minimum of 10% of their assets in liquid securities and 30% weekly. It is anticipated that the SEC will release further changes to the legislation through 2010.

For more information, please see Treasury Today’s Corporate and Institutional Money Market Funds in Europe Best Practice Handbook. A new edition covering all the new legislation effecting money market funds will be published later this year.

Although safety comes at the loss of yield, Sarbinowski believes that investors can still make a good return: “Some of the nefarious securities have disappeared from the market and even anything to do with asset backed has become much more transparent. It just gets back to there being greater confidence in what you’re investing in; thus anyone who takes the time to understand them can be rewarded.”

In practice

So what are the big corporate hitters really up to? At Google, fixed income is the mantra. Brent Callinicos, VP Treasurer, says, “During the financial crisis, we got more conservative on our portfolio and opted for low risk sovereign guaranteed investments. Now that the world economies are recovering from the worst of the crisis, we have moved away from sovereign-only fixed income investments into a diversified fixed income portfolio. This is a staged, steady rollout.”

There is a consensus in the US that corporates can exit MMFs to get some incremental yield which is important in a low rate environment. As such, US corporates are looking at investing in direct instruments, rather than money market funds. This is in direct contrast to Europe however, where money market funds are increasingly popular investments with companies.

In the Eurozone, previously safe sovereign investments are now looking more risky particularly in the PIIGS nations (Portugal, Italy, Ireland, Greece and Spain). Concerns over the risk of debt default by these nations have kept investor cash more fund orientated rather than in sovereign fixed income products. However if the positions of these nations were to improve, which is unlikely in the short term, then it is anticipated that the European market would follow the US into direct investments.

Sarbinowski notes that, “In terms of investors going for direct investment via segregated mandates versus funds we anticipate it will catch on in Europe, but we are only seeing very early conversations about it at the moment.”

What to invest in – the basics

Short-term investments

Treasury bills (T-bills)

Treasury bills (T-bills) are debt securities issued by governments and mature at set periods (one month, three months, and a year). T-bills are sold at a discount to face value and are issued on weekly basis. A return is made when the amount is returned at full value; with the yield being the difference between the discounted and full value price (see the repo market below).

Market comment: Prices of T-bills move inversely to yields. Investors often flock to T-bills in times of market volatility which can drive yields down, sometimes below zero.

Certificates of deposit

A certificate of deposit (CD) is a securitised bank deposit. The certificate demands that the deposit is kept within the bank for an agreed period of up to five years, although it is more commonly used in periods of less than a year. Depositors can be paid a coupon of interest at maturity or at negotiated intervals if the certificate is over a longer period. The advantage of a CD is the negotiable element and the ability to sell off the deposit before maturity.

Commercial paper

Commercial paper (CP) is an unsecured promissory note issued by a company and is therefore a form of corporate debt which usually matures in under a year. Commercial paper risk level can be determined by the company’s credit rating issued by Moody’s or Standard and Poor’s, for example.

Market comment: Industry participants say that a still-sluggish economy coupled with companies looking for longer-term debt in a low interest rate environment, mean that growth in this market is still some way off.

The repo market

Repos (repurchase agreements) are sale and repurchase agreements of investment products, such as T-bills, to a third party at an agreed price. The sale and repurchase occur on a short term basis so that the bond holder can raise cash while buying it back at the same price plus interest. The end result is in effect a secured loan, with rates much lower than LIBOR.

Market comment: The repo market has been affected by the global financial crisis, experiencing a decline in turnover. Repos collateralised with non-government securities have suffered the most, while government bond repos have gained market share. This highlights a key trend within the repo market; a flight to quality.

Long-term investments

Government bonds

As mentioned above, corporates flocked to government bonds, at the height of the financial crisis when security was a big issue. The maturity of government bonds can range from one to 35 years (or longer) but are relatively low yield. As the risk of a government defaulting on its debt repayments is normally much lower than the default risk for companies, sovereign bonds are often used as a benchmark yield for corporate bonds.

Corporate bonds

At the start of 2010 it seemed clear that corporate bond issuance would be the new way to raise finance. At one point in late January the spreads between government and corporate bonds reflected investor sentiment that companies were potentially a safer bet. After an initial uptake, however the secondary market for these bonds has dropped away after there was seen to be a lack of interest from investors.


In the current climate there are two big issues facing corporate pension fund managers: inflation and the future of global stock markets. Most schemes are based on a long-term plan to reduce risk and buy more bonds, or bond-like instruments. However more schemes are also looking to diversify the growth assets, with more diversification of portfolios and a development of risk mitigation strategies.

Nick Sykes, European Director of Consulting, Mercer Investment Consulting, says about UK pension investments that, “2009 was a year that was rich in opportunities but 2010 is looking much harder to extract value out of the market positioning than say a year ago.

This is why people are going back to looking at gilts and questioning if they are happy to have these as their least risky assets. Gilts may be liability matching but they may have risk associated with them in absolute terms because of the possibilities of yields moving higher as the issuance of gilts increases and is no longer offset by the Bank of England’s quantitative easing programme.”


Property can potentially be a good long-term investment. The crisis has lowered the value of several real estate markets around the world, with some becoming undervalued. However it is important to work out any exit strategy to any property investments, as they may become difficult to sell, and hold up vital cash when it becomes necessary.

Where to invest?

The geography of investments really depends on the currency that a corporate is holding. If corporates decide they have more risk appetite, the next question to ask is where should the cash go globally? The trend at the moment is to cover all bases by diversifying, as Sarbinowski explains, “A lot of growth from multinationals is coming from emerging regions and so we do get a lot of enquiries about what can be done in the Chinese renminbi, Indian rupee, occasionally Australian dollar, and Hong Kong dollar currencies because there are not many alternatives.

The only real alternative is to keep it in your local operating bank and I think the reaction that we saw after the crisis is that investors don’t want to have all their eggs in one basket; they would like stronger counterparties.”

Kathleen Hughes, Managing Director, Head of Global Liquidity EMEA, J.P. Morgan Asset Management agrees, “We have AAA rated Asian currency money market funds including renminbi, yen and Singapore dollar that are also popular for clients based in those markets or with subsidiaries based in that part of the world.”

Counterparty risk is still as important as ever and as such greater due diligence is being undertaken by businesses to address the riskiness of investments. Diversified currency investments in the emerging markets are one way of addressing the issue. Corporates thinking of operating in these markets should consult asset managers with what can be done to support managing local currency controls, and to assist in repatriating any potential yields.

Attitude change

So it appears that concern over counterparty default is fading and as a result, risk is once again becoming more acceptable. Having said this, lessons have been learned from the recent global financial crisis, with boards insisting on a more measured approach to risk within company investment portfolios and precautionary measures still in place to prevent excessive risk-taking.

Jan Schets, Director Treasury, Sara Lee International BV, agrees that the company’s own investment guidelines have temporarily become stricter after the crisis and that has not yet abated. “We’re not doing anything special, only what everyone else seems to be doing. We’re using prime money market funds with restrictions on limit of investment, rating, size and WAM (weighted average maturity) of the fund. Furthermore we use short-term bank deposits with restrictions on approved (relationship) banks, and limits on the size and length of the investment.”

Google’s investment policy has retained some of the changes made to the pre-crisis policy; the company’s investment portfolio is more diversified and all investments undergo risk-based checks and balances. Callinicos comments, “The markets are still very nervous and are as such volatile – this can of course be both a risk and an opportunity.”

Kathleen Hughes says, “We have seen a sharp drop in the number of treasurers investing directly in money market securities and instead favouring professional investment management, by a focus on better cash flow forecasting and by a desire to invest only in the most liquid products.”

Post-crisis, corporates are still continuing to rely on AAA rated liquidity funds, however the low level of interest rates across the world has also resulted in some corporates looking to give up the liquidity provided by funds and take more duration risk.

“This strategy only works if the corporate has solid cash flow forecasting and good visibility as to how long the cash can be ‘locked up’. If the investment horizon is a year, we work with corporates to structure portfolios of high quality money market instruments with longer duration,” says Kathleen Hughes.

The attitude of issuers has changed as they have taken advantage of the low rate environment and narrowing spreads to finance longer than anticipated. The money market is clearly still strong, but it is the capital markets that are trying to satisfy the needs of investors who are becoming frustrated with the low return but refuse to move to anything else as they still require safety.

So when is the right time to invest?

There is still an understandable risk aversion from corporates and, when it comes to investments, peer confidence will play a part in the exact timing of getting back into the riskier areas of the market. With interest rates likely to remain low in the near term, there will be a continuation of the trend to add duration risk to cash portfolios rather than credit risk.

Treasurers are increasingly focusing on extending the duration of cash portfolios by allocating longer-term cash to longer-dated securities or funds, with an investment horizon of one-year plus. As a result, corporates can potentially benefit from the higher interest rates that are available further along the yield curve.

Kathleen Hughes says, “Clearly this option is only available to corporates with relatively stable cash balances and reasonably predictable cash flows, but giving up some liquidity in favour of duration, could become an increasingly viable option for many treasurers.”