Context: Federal Reserve rate cuts this year, including one this week, and the prospect of lower yields on Treasury securities mean more cash investment managers may be considering how to keep interest income flowing as returns on government money market funds (MMFs) decline. While safety and liquidity remain the guiding lights for most managers, some corporates allocate a portion of their portfolios to corporate debt—including commercial paper (CP)—to capture incremental yield. That’s especially true for companies holding billions in cash and short-term investments. In a recent discussion on the online community of NeuGroup for Large-Cap Treasurers, one member asked peers how much of their portfolios is invested in corporate debt, whether they use separately managed accounts (SMAs) and what criteria drive their credit selections. The responses describe a measured approach—keeping duration short, maintaining high credit standards (typically limiting investments to high-grade issuers) and being selective about sector exposure. As rates fall, some cash investment managers will need to decide if and when to extend duration and whether step further into corporate debt and other securities to sustain yield.
Member question: “For those holding more than $1 billion in cash: Are you investing a portion of that cash in corporate debt securities (of other companies)? If so:
- “Do you use an SMA or do you make selections yourselves?
- “What criteria do you use for your selection process?”
Peer answer 1: “At our company we have about $1.7 billion in global cash. Roughly $750 million–$1 billion is externally managed via SMAs. Our investment policy dictates concentration maximums and minimum credit ratings for corporate debt. We do not manage any of this in-house.”
Peer answer 2: “Most of our cash is in MMFs, relationship bank deposits and direct investments in Treasurys (up to three years). By policy, we can invest in CP (20% of cash, min A2/P2) and corporate bonds/notes (10%, min A/A2). Latter can go out three years and we invest directly. As a practical matter, our corporate bond investments have maxed at the $100 million area. We avoid financials and sectors with headline risk.” Peer answer 3: “We use SMAs for a portion of our roughly $4 billion in cash and investments. We also use direct MMFs for the portion that we want to keep current. In the SMAs, we have an investment policy that allows us to invest in MMFs, U.S. government securities, corporate bonds and CP, ABS, CMBS, munis and CDs. Credit quality requirements are generally high. Longest tenor is one year, but on average the tenor is shorter.”
Peer answer 4: “We don’t use SMAs. We do invest in corporate CP during our peak cash season to diversify away from financials; the tenor is relatively short—about 60 days. We look at the credit rating of the counterparty and follow our investment policy counterparty exposure limits. If the corporate is A2/P2 we will do additional diligence and the counterparty maturity limits are shorter.”
Peer answer 5: Another member told NeuGroup Insights that approximately 30% of his company’s cash portfolio is invested in corporate debt. “We only use SMAs. Selection of issuers is done by the managers; we indicate average credit quality, minimum credit quality, maximum percentage corporates and BBB percentage,” the member said.
Staying selective amid uncertainty. On the question of going farther out on the yield curve, one treasurer contacted by NeuGroup Insights said, “We are still being selective on extending duration right now. Fed funds is still a higher yield going out for more than 10 years. And there is still a lot of uncertainty around how many cuts we will see over the next 12–15 months.”
- He added, “Credit is both related and separate to rates. I generally have no problem always having exposure to strong BBB credits and above. I might be careful on sector and total exposure in times of dislocation or crisis, but otherwise I like the additional yield (even when low).”
