How concerned are corporates by liquidity at the moment? Anecdotally, are treasurers flush with liquidity or is it a concern and why?

From our conversations with treasurers, it seems most currently have healthy cash levels, and while they are enjoying the period of higher rates, they are also keeping half an eye on where rates will go in the six to 12 months ahead. With this in mind, it is clear that in the current economic environment, corporate treasurers remain motivated to explore low-cost ways to generate return on cash.

Of course, levels of liquidity in a business will vary from business to business depending on their cash requirements, but we haven’t observed treasurers making significant strategic decisions to increase their cash levels. However, with global M&A deal value slumping by 36% in Q1 2024 according to EY-Parthenon’s Deal Barometer, as a result, we are seeing higher levels of cash being held at the Group level rather than being put to work in acquisitions.

It is refreshing to hear that there is certainly growing awareness amongst treasury professionals that money market funds are not just a holding station for cash but can offer benefits including daily liquidity, flexibility, diversification, shelter from market volatility and, in a higher for longer interest rate environment, they can still deliver compelling yield.

What kind of short-term cash management strategies are corporates favouring in the current climate and why?

Treasurers are increasingly looking to money market funds – professionally managed, diversified investment vehicles – which they can use to meet short-term cash management needs, or as an investment alternative to the volatility seen in stock or longer-term bond investments. Treasurers tend to be attracted to these solutions by the ability to manage their short-term cash needs for emergencies and near-term requirements, while offering easy access to their cash and the potential for a market rate of income through investments in high-quality short-term debt securities.

Over the last nine months, as interest rates have plateaued, investors in UK liquidity products have typically received a return comfortably above the return on two-year UK gilts, representing an attractive premium for corporate treasurers over bank deposits, without the relative capital risk.

What are the key risks treasury teams should consider when looking at MMFs?

Money market investments are sometimes referred to as ‘cash’, but treasurers must understand there are significant differences between the two. A money market fund (MMF) – unlike cash held in a bank savings account – is ultimately an investment that carries associated risks. WhileMMFs are considered among the safest asset classes on the investment spectrum, they are, however, adaptable to changes in interest rates, credit and liquidity conditions in particular. However, their ability to deliver above base rate returns distinguishes them from cash, while their flexibility sets them apart from other fixed income and equity investments. As such they are typically highly liquid, minimal credit risk high-quality mutual funds with the primary investment objective of current income, consistent with liquidity and stability of principal.

MMFs are also often used by corporate treasurers to manage risk and add some stability to an overall investment portfolio. Within a portfolio of risk assets, maintaining exposure to a MMF can act as an effective diversifier on account of their lower volatility and risk profile. As MMFs aggregate assets from numerous investors and generally invest across a broad spectrum of holdings, they also afford investors access to a diversified portfolio of securities with a lower initial investment threshold.

It is important that treasurers choose vehicles that are suitable for their investment horizon, tolerance for volatility and need for highly liquid investment options – choosing a manager with a consistent track record and deep understanding of these vehicles, backed by an experienced and robust credit analysis team is essential.

What kind of bespoke solutions are you seeing in the market? Why would a treasury team favour this approach?

Many corporate treasurers are now turning their attention to liquidity solutions which can extend their weighted average maturities in response to the latest developments in central bank policy, seeking out higher-yielding securities and paper further out the yield curve and maximising returns for investors, while at the same time offering same day access. However, should central banks further delay cuts – or moderate easing plans – we may see treasurers hesitating to move out of liquidity vehicles too soon and miss out on yield.

Historically, ESG has been a focus for local authorities and universities looking to invest in MMFs, however it is clear this is also a growing consideration for corporate treasurers as well, with renewed caution over exposure to high-risk geographies and sectors.

Could you talk a little about demand for different currencies in standard and short-term MMFs?

Around the world, MMFs – whether sterling, euro or dollar-denominated – have gained sizeable inflows over the last couple of years on the back of the sharp rise in rates. US MMFs hit an all-time high of more than US$6trn earlier this year.