For years, investing surplus cash has been a frustrating experience for corporate treasurers. When the Federal Reserve reduced interest rates to zero in late 2008, it marked the beginning of a new era of low, or even negative rates. In the euro area, negative yields became a reality in 2014, when the ECB cut its deposit rate to -0,10%¹, which was followed by four more downward steps. Consequently, treasurers struggled to preserve liquidity – a task intensified when many companies increased their cash buffers following the outbreak of Covid-19.

It would seem that the wind has changed: While the ECB has raised its key interest rates ten times since July 2022 – the deposit rate now stands at 4.00%² – the Federal Reserve has sanctioned 11 hikes in 16 months and recently increased its Federal Funds Rate to 5.25% to 5.50%.³ These are levels not seen since the start of the 2000s.

Despite these rate hikes, investing surplus cash is still a demanding activity for corporate treasurers and the job is even getting harder for several reasons (see Figure 1).

Figure 1: Challenges for investing (short-term) cash

First, inflation is eating up investment yields. In the US, annual inflation reached 3.2% in July 2023⁴ but was as high as 9.1% in mid-2022, while in the euro area the consumer price inflation rate still stands at 5.3%⁵ after hitting 10.6% last October. These inflation spikes are the reason why the central banks are raising interest rates – and their actions have shown some success with inflation easing from last year’s 40-year highs, yet still remaining well above the target levels.

Second, turbulence in the banking sector earlier this year have put a spotlight on counterparty credit risk. The failure of three larger US banks and the rescue sale of Credit Suisse to UBS reconfirmed what many treasurers regard as the leading principle for investment decisions: Reducing risk and ensuring immediate access to liquidity are more important than maximising yield from surplus cash.

“The need for safe investment options, which ideally participate from the rising market rate, has increased”
Thomas Mayer, Global Head Liquidity Sales Cash Management & Head Cash Sales DACH, Deutsche Bank

The need for risk reduction is reinforced by China’s economic slowdown. Against the backdrop of a slump in the country’s property market, problems in the shadow banking system and continuing geopolitical tensions with the US, the world’s second-largest economy might no longer act as the engine of global growth.⁶ This adds further complexity to cash investment decisions.

“In this environment, the need for safe investment options which ideally participate from the rising market rate, has increased,” observes Thomas Mayer, Global Head Liquidity Sales Cash Management & Head Cash Sales DACH, Deutsche Bank. “It’s time for a new approach, which allows treasurers to access instruments that have been out of their scope so far.”

So, what are the instruments that corporate treasurers currently use to invest short-term liquidity? Predictably, overnight and time deposits play a major role. According to a poll during a recent webinar by Economist Impact and Deutsche Bank, 67% of respondents use bank deposits to park their company’s liquidity.⁷ In Germany, a DerTreasurer and Deutsche Bank webinar showed an even greater number (80%) of treasurers trusting in bank deposits.⁸

Both polls revealed money market funds (MMFs) as the second-most popular instrument; MMFs are used by just under half of the respondents (42% and 48%), followed by commercial paper, in which no more than one in five company invests (17% and 20%).

Another potential instrument which is popular among institutional investors but very few corporate treasurers have looked at so far are reverse repos. “Put simply, reverse repos are a form of collateralised deposits,” explains Mayer. “For the tenor of the investment, the counterparty provides the company with a set of securities. This collateralisation reduces counterparty exposure while the yields are competitive to standard term deposits.”

One reason why reverse repos are not yet on many treasurers’ radar is the administrative work that goes along with investing in these instruments. “Negotiating master agreements with banks, contracts with providers such as Clearstream or Euroclear, onboarding every single counterparty and adhering to regulatory reporting requirements are complex tasks,” says Mayer.

To address this, Deutsche Bank has created its Cash Investment Service (CIS). “The service allows treasurers to access investment alternatives to bank deposits in a time- and cost-efficient way”, says Mayer. Through the bank’s agency trading desk and, according to investment rules stipulated by the client themselves, clients can “invest excess cash securely via reverse repos against various bank counterparties,” Mayer adds. Clients can further invest into MMFs from leading providers with different underlying holdings and fund characteristics.

Figure 2: Exemplary trade execution in agency repo

One of the companies that uses CIS is the global container liner shipping Company Hapag-Lloyd. During the Covid-19 pandemic, freight rates surged dramatically, which drove cash levels of the Hamburg-based company to record-breaking heights in 2021 and 2022, explains Michael Kastl, Managing Director Treasury & Finance at Hapag-Lloyd: “This led to the situation where it was no longer possible to only use overnight and time deposits within our existing counterparty management.”⁹

“Reverse repos are like a mixing desk”
Michael Kastl, Managing Director Treasury & Finance at Hapag-Lloyd

The company responded by seeking alternative investments that still allowed liquidity to be treated as cash or cash equivalent according to IFRS accounting standards, while not increasing counterparty credit risk. MMFs and reverse repos turned out to be a perfect fit. “Reverse repos are like a mixing desk. We can adapt the collateral basket, for example by including high-yield securities to increase yield. In turn, we may increase the collaterisation ratio to lower risk,” Kastl explains.

“For us, the platform is the ideal solution to access different counterparties with one contract,” he continues, admitting that ideally even more counterparties joining the platform would allow Hapag-Lloyd to further diversify its investments.

The onboarding of more counterparties is on the bank’s agenda, Mayer confirms. “Platforms allow for a much faster and efficient process which helps treasurers in their daily operations.” He believes that Cash Investment Service offers a good opportunity for all companies that want to streamline their cash investments processes – no matter what the current interest rate environment looks like.

Sources

¹ See ecb.europa.eu
² See ecb.europa.eu
³ See federalreserve.gov
⁴ See tradingeconomics.com
⁵ See tradingeconomics.com
⁶  For further information read the flow article Navigating China’s slowdown
⁷ See flow article Managing liquidity in a changing environment
⁸ See dertreasurer.de
⁹ See also the flow case study, Seafarers of net zero