Cash & Liquidity Management
Published  8 MIN READ

Cash Segmentation, Diversification and Classification

Cash segmentation, where treasurers split their cash into operational, reserve, and strategic buckets and invest accordingly, has been a valuable strategy during the perpetual low interest rate environment. It has enabled corporates to take an amount of cash allocated to short-term investing and buy into ultra-short bond strategies that offer the potential to gain additional yield with only a marginal increase in risk.

Cut to the summer of 2022, and inflation in the US and UK is surging to heights not seen for at least 40 years. In response, the Federal Reserve and the Bank of England have implemented rate hikes. How will the strategy stand up to these new economic data points?

Daniel Farrell, Director, International Short Duration Fixed Income, Northern Trust Asset Management (NTAM), advises that cash segmentation works well when the market is pricing in more rate increases than fund managers predict will happen.

“We’re currently seeing aggressive rate hike pricing across all central banks, globally,” Farrell notes. “The question is, do you believe they will embark on all those rate hikes? If not, then an ultra-short strategy is a good place to be as you can start to invest at those higher yields. You can go slightly further out along the curve to five-year maturities, for example, which will provide higher yields than if you were investing out to one year.”