Treasurers stay focused on liquidity, safety

A desire for safety and the lack of options are leaving most cash management strategies unchanged, following the drama of the first-ever U.S. credit rating downgrade and the Federal Reserve Bank's decision to freeze interest rates for at least two years.

It's clear that the financial meltdown is still fresh in treasurers' minds. “What we learned in 2008 is that liquidity is everything,” Thomas C. Deas Jr., vice president and treasurer of FMC Corp in Philadelphia, and chairman of the National Association of Corporate Treasurers in Reston, Va., said in an interview.

In the spring of 2008, FMC moved pension fund cash from regular money market funds to “safe” ones that invested in government securities because “there really weren't any seats left in the lifeboats,” Mr. Deas said.

“We took the same decision for corporate cash.” That still holds today. “We believe that diversification, having that range of maturities, provides safety for us,” he said.

For state treasurers, options are particularly limited, by statutes that set policies for cash management. “The most important thing is always protecting public funds,” said Kevin Johnson, communications director for the National Association of State Treasurers, Lexington, Ky. “The priorities are safety, then liquidity, then yield.”

Tom Dresslar, spokes-man for California Treasurer Bill Lockyer, noted that in 2007, “we made a clear decision to solidify liquidity and safety” by boosting allocations to Treasuries from 3.5% at the time to the 57.72% of roughly $65 billion in assets that it is now. “We plan to stay the course.”

The same is true for Florida, which has 65% of its $20.6 billion Treasury Investment Pool in Treasuries and related obligations. “We do not anticipate changes in our cash management strategy,” said Anna Alexopoulos, spokeswoman for Chief Financial Officer Jeff Atwater.

Corporate treasurers historically have had a significant portion of their cash investments in U.S. Treasuries. Five of the most cash-rich companies in the Russell 3000 had 44.85%, or $76 billion, of their cash pools invested in U.S. government securities.

Some companies were shifting toward bank deposits earlier this year, “but we're seeing a shift back into Treasuries now,” said Tom Hunt, director of treasury services for the Association for Financial Professionals in Bethesda, Md. “It's been kind of a whipsaw.”

In a direct reversal from a July survey of financial professionals that found 20% of them shed some holdings during the debt ceiling debate, an AFP survey earlier this month found few companies planning any changes to their short-term investment strategy following the S&P downgrade of the U.S. government's credit rating. Only 5% of companies were shedding some Treasury holdings and another 15% were simply not planning to add to their holdings.

The survey also found that most companies' investment strategies allowed such holdings even with a credit rating below AAA.

“Safety is priority No. 1,” explained Mr. Hunt. “There isn't a lot of interest in going out too far on the yield curve. A lot of treasurers are still very skittish.”

The question of liquidity is so important for corporate treasurers that the National Association of Corporate Treasurers recently worked with Moody's Investors Service to help design a new ratings approach for money market funds that looks beyond an investment's underlying security to assess liquidity, with a test-case scenario based on what would happen in the event of a one-day redemption.

Ease of redemption is the bigger concern for treasurers.

“People know that the action S&P took isn't going to impact redemptions. The time horizon that most treasurers are investing cash in is short term and treasurers don't believe there is going to be an immediate problem,” Mr. Deas said.

Mr. Dresslar in California agreed. “It's obvious that S&P hasn't exactly hurt. ... The effect of the downgrade has been more psychic than real.”

AFP's Mr. Hunt added: “The whole volatility in the equity side of things really didn't spill over to the fixed-income side, which tells you that the market didn't like the rating.”

He expects the next trigger for change to come if the Fed starts tightening again. “If yields improve, you'll have more options. What are the alternatives now? There really aren't any.”