Once overseas assets have been repatriated to the U.S., most corporations will likely hand the cash balance to their treasury departments for safekeeping. Treasurers will then have to determine the best short- to medium-term uses for these funds.
They will need to balance three primary considerations in looking at investment choices: the safety of the investment; the liquidity of the asset; and the yield it generates.
The simplest investment that meets all three criteria is a money market fund, combining a high level of security and liquidity with attractive returns and wide diversification across counterparties. Investment in money market funds is broadly permissible under the investment guidelines within which most corporations operate, as opposed to alternatives such as prime funds, which many entities cannot invest in because of the funds' floating net asset value and redemption gates.
Other investment options cash managers could explore include U.S. Treasuries, agency debt, commercial paper, brokered certificates of deposit and short-term credit. In many instances, however, investment rules prevent treasurers from investing in some of these credit products.
If cash managers wish to have the latitude to invest in a wide spectrum of instruments, the time to start this conversation with the investment committee is now.
The importance of having a variety of investment avenues at the disposal of treasurers is reinforced by the fact that leaving large cash balances with bank counterparties as unsecured deposits is today a less feasible option due to the regulatory capital charge non-operating deposits generate for banks under the liquidity coverage ratio.
The pressure to make the right investment decisions for these cash stockpiles is compounded by the rising rate environment. Following three rate hikes by the Federal Reserve in 2017, many economists are expecting three further increases in the federal funds rate in 2018. This means we could be ending the year with Fed base rates at 2%, a level last seen in April 2008.
The transition from a low interest rate landscape into a rising rate environment adds a further impetus for treasurers to be particularly shrewd in how they allocate funds across the liquidity spectrum.
Cash managers need to start thinking now about how they intend to position themselves for managing potentially very large balances. One question they should ask themselves is whether they have access to short-term investment vehicles that will allow them to earn yield on these repatriated balances in a flexible and easily redeemable manner.
Money market funds could be an ideal choice — but treasurers should ensure they have the requisite banking relationships and permissions in place to invest in a broader range of services. If easy access to such services is not already in place, now is the time to start putting those wheels in motion.