The cash investment landscape is being disrupted by higher sustained inflation, rising interest rates, and new regulatory proposals for MMFs. Corporate treasurers not only need to evaluate the impact of these various drivers on their optimal portfolio composition – but must also be prepared to take action.
The low interest rate environment of the past few years has seen corporates becoming increasingly creative when deploying their cash, as a means to chase yield. Consequently, investments in short-duration bond funds and in prime MMFs became attractive propositions. However, change is afoot as inflation now threatens to overheat economies across the globe and central banks look to rate hikes to rein in price rises. In fact, some central banks have already made telling moves. In its May meeting, the Federal Reserve raised its core rate 50 basis points, its biggest hike since 2000. This was on the heels of its quarter basis point hike in March – the first since 2018. Meanwhile, the Bank of England has raised rates by 0.25% four times since December 2021, taking UK interest rates to their highest level in 13 years.
Tory Hazard, Chief Executive Officer, Institutional Cash Distributors (ICD), comments: “We’re going into a rising rate environment and, as a result, we’re now seeing a decrease in demand in short-duration bond investments. Bond funds in rising rate environments tend not to do as well as MMFs which have an even shorter duration. We do have some clients in ultra-short bond funds who accept some principal risk for higher yields, but there is less demand for those products due to the expected rate increases in 2022 and 2023.”
Rate rises could occur at every Federal Reserve monetary policy meeting this year, as 2022 has seen inflation continue to accelerate in the US. In March 2022, the US Bureau of Labor Statistics revealed that the Consumer Price Index – the standard measure of national inflation – had hit 8.5%, the highest monthly year-on-year inflation rate since December 1981. One of the by-products of higher inflation is more cash building up on corporate balance sheets.