Planning Liquidity in Times of Uncertainty

The 2022 AFP Liquidity Survey, conducted by the Association for Financial Professionals (AFP) and underwritten by Invesco, aims to understand current and emerging trends in organizations’ cash and short-term investment holdings, investment policies, and strategies, given the current economic environment. Nearly 300 treasury practitioners responded to the survey.

Here is what they had to say in five key areas:

1. Short-term investment allocation.

In terms of bank deposits, we found that most organizations are currently maintaining 55 percent of their short-term investments in bank deposits, which is up 3 percentage points over last year. Is it possible that this is due to the coronavirus pandemic? Absolutely, as companies have been focused on liquidity planning for the past two-plus years.

Bank relationships have been key for treasurers navigating the uncertainty created by Covid. This started in the spring of 2020, when interest rates dropped to zero and organizations needed to draw down their liquidity. Then, earlier this year, as inflation reached relatively high levels in the United States, the Federal Reserve began raising interest rates—including two 75 basis points (bps) increases. Most investment options continued to offer low yields, providing little incentive for companies to move away from bank deposits.

Where are the majority of organizations allocating their short-term investment balances? According to our survey, an average of 81 percent are designating them to safe and liquid investment vehicles that include bank deposits, money market funds (MMFs), and U.S. Treasuries. This is the highest figure on record since AFP began tracking the data. In fact, according to 93 percent of our respondents, the number-one driver for deciding where to place deposits is the organization’s relationship with its banking partners.

2. Preparing portfolios ahead of anticipated rate increases.

On March 16, 2022, the Federal Reserve indicated that the Federal Open Market Committee (FOMC) was increasing its target for the federal funds rate—for the first time since 2018—stating: “… [the] implications for the U.S. economy are highly uncertain, but in the near term, the invasion and related events are likely to create upward pressure on inflation and weigh on economic activity.” In June, and again in July, the Fed increased the federal funds rate by 0.75 percent, which is the highest rate of increase since 1994. The Fed is expected to continue raising rates until inflation slows.

How are organizations preparing for these anticipated rate increases? According to the AFP survey:

• 57% are managing the duration of their portfolios.
• 34% are shortening the duration of their assets.
• 19% are reviewing positive real yields among permitted investments.
• 16% are diversifying investments/asset classes within their investment policy.
• 15% are monitoring credit spreads to capture value within their investment policy.
• 7% are considering inflation-protected securities and floating-rate notes.

Anecdotal evidence suggests that treasurers will continue to maintain their bank deposits. However, at the same time, they are assessing their banking relationships to understand how their earnings credit rate and deposit rate will benefit from the increases in market rates.

3. Safety is number one.

Safety continues to be the most-valued short-term investment objective for 63 percent of organizations, which is 1 percentage point higher than last year. This is not at all surprising, given the uncertainty in the economy.

4. Growing popularity of ESG investments.

The share of organizations considering environmental, social, and corporate governance (ESG) parameters when choosing investments increased to 25 percent, according to this year’s survey. Last year, that number was 17 percent. This 8 percentage point increase mostly reflects a shift of treasurers from the category of “unsure” responses to “yes.”

Why have so many treasury professionals become more sure of the importance of ESG investing? One possible reason is an increase in ESG-focused MMFs. In an effort to encourage investment from institutional holders, these funds have been waiving their fees.

At the time of this writing, the top-yielding ESG money market funds are prime funds that hold a high percentage of financial institutions in their portfolio across different asset classes. It’s worth noting that many MMFs have underlying investments which qualify as ESG; thus, they are now considered ESG-focused, even if their name hasn’t changed to reflect the focus.

5. Preparing for the end of LIBOR.

The end of LIBOR is just around the corner: June 30, 2023. How prepared are organizations? Only 26 percent of respondents said their organizations have plans in place to prepare operating cash and investment portfolios for the end date. This is considerably higher than the 15 percent of last year’s respondents who reported being prepared. Still, the end of LIBOR seems to not be high on finance professionals’ list of priorities. Rather, their focus is on helping their organizations maintain resiliency post-Covid.

When it comes to the end of LIBOR, most companies are in a mode of discovery and learning. Perhaps, as the deadline gets closer, more and more organizations will prepare for the transition, which may be indicated by an increased use of the Secured Overnight Financing Rate (SOFR) and new global reference rates in the investment landscape.

See also:

• How Is the LIBOR Transition Going? — part 1
• How Is the LIBOR Transition Going? — part 2
• LIBOR’s Decades-Long Dominance of Rates Is Over
• Are You Ready for the Cessation of USD LIBOR?

The period of uncertainty we are living through is likely to prevail for the foreseeable future. It is up to business leaders to prepare their organizations to survive these challenging times with minimal disruption. In the face of our current economic and geopolitical challenges, and in the foreshadowing of things to come, safeguarding an organization’s cash and short-term investment portfolio is going to be imperative for treasury leaders.

Tom Hunt, CTP, is the director of treasury and payments services for the Association for Financial Professionals. Hunt is the staff subject matter expert on bank relationship management, cash management, and treasury technology. He is in charge of AFP’s Treasury Advisory Group, the member committee dedicated to meeting the needs of the profession and helping keep members current on developing topics.

Mariam Lamech is the director of survey research for the AFP. In this role, Lamech manages the project lifecycle for AFP’s proprietary research, including survey rationale and design, survey administration, analysis and interpretation of survey data, and writing and producing AFP’s survey reports. Lamech leads and executes AFP’s survey research, with a focus on enhancing the value of AFP’s external survey projects to the treasury and finance profession through the development and production of ancillary products. She has nearly 25 years’ experience within research functions at associations.

Want to know more about liquidity? AFP has you covered. Check out the 2022 AFP Liquidity Survey web page, companion webinar, and more.