With the interest rate and bond market environments experiencing some of the highest levels of volatility and uncertainty in recent years, it remains a challenging time for corporate treasurers seeking to implement cash management strategies. However, despite the negative global environment, this uncertainty means “there are a lot of securities available at the moment that are attractive for the treasury market” offering security, liquidity and “a better yield than lending on an unsecured basis”, according to Craig Inches, head of rates and cash at Royal London Asset Management (pictured above).
“If you look at various metrics around volatility, and usually around US treasury markets, daily treasury markets are now as volatile – if not more volatile – than we saw in the [2008] financial crisis,” Inches told the ACT annual Cash Management Conference. Discussing cash interest rates and cash management strategies, he described rates markets that had become “more predicated by hedge funds, fast money, by people who have more invested in terms of their positioning by changes in interest rates”. This comes against the background of interest rate volatility driven by US President Donald Trump’s administration’s approach to policy, which is having a huge impact on interest rate expectations.
The resulting inflationary pressures alongside negative pressure on growth have left global central banks with a dichotomy around what to do with interest rates – with a subsequent impact on treasurers’ cash management strategy.
This, said Inches, brings up a raft of questions: “Where is the best country to be invested? Where am I going to get the least volatility? What impact will those interest rate moves have on corporate spreads? What impact will they have on my borrowing costs? What impact will they have on the global health of the economy and therefore how do I protect myself within cash management?”
You need your cash manager to be able to access liquidity at all times
Capital preservation is key, he said, with one strategy being diversification of assets. Another key pillar is to embed as much security as possible to navigate daily risks, while liquidity is also vital. “You need the liquidity, you need your cash manager to be able to access liquidity at all times,” Inches advised.
He highlighted various instruments that could offer more liquidity, such as treasury bills issued by government, covered bonds exempt from bail-in but which are eligible for collateral against derivative payments. “There are a lot of different instruments that you can build within a cash strategy to try to facilitate liquidity in stressed environments,” Inches said.
“The benefit is that a lot of these instruments are providing you with a better yield than lending on an unsecured basis. You can buy these secured assets, they’re giving you higher yield, so that’s a really nice environment to be in at the moment,” he continued.
“You can get additional yield in a lot of cases as well. They're in a floating rate format, which is great because if you don't know if interest rates are going up or going down, you've got that flexibility. You're getting a floating rate plus a nice spread, security exempt from bail-in and in a lot of cases it can be triple the rate.”
Phil Lattimore is a freelance journalist
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