It was only a few short months ago when treasury professionals and the rest of the world were expecting three or four additional Fed rate increases in 2019. What a difference a new year makes. Since then, the suddenly dovish Fed has changed its stance with a markedly more conservative tone towards potential interest rate movements in 2019. In fact, for the first time in 10 years the Fed Funds target range has the possibility of declining by as much as 50 basis points from current levels, as evidenced by June 2019 Fed Funds Futures projections. Wow.
This drastic change is, of course, precipitated by actual and trending inflation numbers that look like New England Patriots quarterback Tom Brady got his hands on them – deflating from a peak rate of 2.9% in July 2018 to 1.6% in just six months. This abrupt change is paralleled by a flattening of the yield curve that has the spread of the 10-year over the two-year at a mere .17%. A change of this proportion and timeline provides ample support as to why many treasury professionals are re-evaluating their short-term liquidity and cash management strategies.
As the Rate Environment Changes, so too Must Your Cash Strategy
Money market mutual funds came into the year poised to enjoy a steady run-up in interest rates – a rising rate environment tends to see treasurers move cash out of deposit programmes into money funds that are best positioned to take quick advantage of higher, repriced paper. The opposite can hold true in a flat/declining rate environment, thereby advancing the appeal of structured bank deposit programmes, typically used to reduce portfolio risk, diversify Rule 2a-7 fund exposure, and potentially increase overall cash returns.
Structured bank products (e.g. FICAÂ®), which are used by 43% of treasury professionals, according to the 2018 AFP Liquidity Survey, are full faith and credit vehicles, liquid, and are currently competitive performers compared with most government money funds.
With this week's Federal Open Market Committee meeting (March 19-20) having the expectation of no adjustments to short-term rates, now may be the time to re-evaluate your operating cash strategy and determine if a liquid insured bank deposit vehicle may make sense. At a minimum, it introduces another means to diversify operating cash portfolios, which may be suitable in an uncertain rate environment.