Treasurers: Balancing Liquidity, Diversification, and Daily Demands
Corporate treasurers today are managing an increasingly demanding role. They must navigate volatile markets, mitigate financial risk, and ensure the business meets its ongoing liabilities while maintaining or improving its financial position. As these challenges mount, treasurers are turning to liquidity management to safeguard cash flow and maintain flexibility. While liquidity is essential for meeting immediate cash needs, we believe that treasurers can potentially gain additional flexibility with a well-diversified portfolio. Diversification can help reduce vulnerabilities and improve adaptability while maintaining access to cash. Yet, many treasurer portfolios lack this balance, leaving them vulnerable to market shifts and geopolitical risk. Restrictive investment policies and limited time to explore newer tools only add to the challenge, leaving little room to evaluate or implement diversification strategies.
This lack of diversification is supported by our recent treasury survey findings in partnership with Treasury Management International 1 , which revealed that 30% of treasury teams have 76% to 100% of their short-term investment portfolio in bank deposits ( Exhibit 1 ). This is higher than last year’s survey when 18% of respondents had 80% to 100% in deposits. While bank deposits are often seen as safe havens, treasurers must always consider that the lack of diversification can leave them vulnerable to unforeseen market shifts – with the collapse of Silicon Valley Bank in March 2023 providing a prime example.
The good news is that diversification doesn’t have to be overly complex. By incorporating accessible liquid options to diversify their portfolios, treasurers can take meaningful steps to ease risk, enhance flexibility, and maintain the liquidity they need to navigate today’s dynamic markets.
Exhibit 1: SHORT-TERM INVESTMENT PORTFOLIOS FAVOR BANK DEPOSITS
Survey respondents were asked: “What is your current approximate cash allocation (in percentage terms of investible cash balance) to the following instruments?” Bank deposits were the most common response at 76% to 100%.
The Case for Liquidity and Diversification
When asked about their top challenges, treasurers in the survey identified liquidity and an uncertain rate environment ( Exhibit 2 ). We believe diversification can address these concerns by spreading holdings across assets with varying sensitivities to rate changes, thereby reducing overreliance on any single instrument. Diversification can also help treasurers quickly reallocate funds to respond more effectively to market shifts, capitalize on opportunities, or meet sudden cash needs without being locked into less favorable positions. Tools like money market funds (MMFs) allow organizations more flexibility in a changing environment rather than being constrained by inflexible choices. This combination of liquidity and diversification is especially critical in a financial landscape shaped by mixed economic signals and diverging central bank policies.
Exhibit 2: LIQUIDITY AND FLUCTUATING INTEREST RATES ARE TREASURERS’ TOP CONCERNS
Survey respondents were asked: “In order of priority, rank your top three concerns affecting your short-term investment decisions today.”
Money Market Funds: A Practical Solution
Money market funds offer a powerful combination of liquidity and yield, making them an essential tool for treasurers. Unlike bank deposits, these funds typically retain higher yields for longer periods, even in a falling rate environment, which may help treasurers manage cash flow without sacrificing returns. MMF managers can actively manage duration – the interest-rate sensitivity of the fund – by increasing the weighted average maturity of the portfolio when rates are declining and decreasing it when rates are rising. The diversified underlying investments of money market funds provide a built-in layer of resilience, helping treasurers balance risk across their liquid holdings. Furthermore, during an interest rate downturn, treasurers who exclusively rely on bank deposits and extend terms to enhance yields may unknowingly increase risk due to single counterparty exposure.
In contrast, treasurers who spread resources across multiple money market funds can further strengthen their portfolios. These funds offer daily liquidity and help reduce single counterparty risk, making them an attractive complement to traditional bank deposits. Revisiting restrictive corporate policies tied to outdated assumptions could also open up opportunities to better integrate money market funds into a broader liquidity strategy.
Building Resilient Liquidity Strategies
Bank deposits are an essential cornerstone of liquidity management, offering treasurers convenient cash access. That said, money market funds complement this foundation, giving treasurers an additional tool to diversify and strengthen their cash management strategies. Beyond MMFs, treasurers might also incorporate short-term bonds and Treasury bills as part of a well-rounded plan. Cash segmentation, a framework to align liquidity needs and investment horizons while optimizing returns of your entire cash portfolio, may further enhance the overall strategy. Such a diverse framework can help support immediate needs while maintaining focus on the organization’s broader financial priorities.
Technology also plays an important role in executing these strategies. Liquidity management platforms, application programming interfaces (APIs), and digital assistants can streamline operations and improve decision-making. APIs act as digital pipelines, connecting treasury systems with external financial platforms to automatically exchange data in real time. This integration replaces manual processes, reduces errors, and provides faster access to actionable insights. Digital assistants are advanced AI tools that track trends, assess potential risk, and uncover diversification strategies, helping treasurers make informed decisions in less time.
Diversified Liquidity as a Strategic Tool
Liquidity is critical to adaptation in an increasingly volatile world. Treasurers who stay flexible and diversify their investment options are likely better positioned to navigate uncertainty, respond to change, and plan for growth. Partnering with experienced advisors and leveraging the latest technology adds an additional layer of agility, allowing treasurers to pivot swiftly, especially under time constraints. While challenges for treasurers will persist, a proactive approach to liquidity offers more than stability – it equips treasurers to adapt, grow, and chart a sustainable path forward.
