Looking Beyond Traditional Cash Instruments to Increase Yield

The low interest-rate environment had already persisted since the Global Financial Crisis, but in response to the Covid-19 pandemic central banks cut interest rates even further and used non-conventional monetary policy to ease financial conditions. The impact of the health crisis on market conditions has further increased the challenges of holding cash for treasurers. Daniel Farrell, Director of International Short Duration at Northern Trust Asset Management, discusses how cash segmentation offers an alternative option for treasurers seeking to efficiently manage their cash and enhance those much sought after returns.

The low and even negative interest rate environment has dented the ability of treasurers to earn returns from traditional investments such as deposits, money market securities, or even money market funds (MMFs) – something not expected to change anytime soon. Undeterred by recent spurts of inflation, central banks remain committed to accommodative monetary policy to support the global economic recovery by keeping interest rates low.

“We have been proponents of the ‘lower for longer’ yield environment for the last 10 years and we expect it is now the case that it will be ‘lower for even longer’,” explains Farrell.

The second challenge that corporate treasurers should be aware of is the likelihood for increased regulation in MMFs. Following the market events in March 2020, regulators have begun consultations on further regulatory changes. Although European money market reforms in 2019 helped fund managers to navigate the challenging period, risks are tilted towards tighter regulations and more compressed money market yields. While undefined and still in discussion phase, any additional regulation will place even more downward pressure on yields in cash reserves.

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