Bank deposits remain the largest home for corporate cash. Post-SVB, diversification across banks, and into other instruments has increased, but approximately half of all corporate cash still sits in a bank account. This differs by region, with US corporates holding less bank cash compared to Europe and Asia; and by company size, with medium size companies still keeping 70-80% of their funds in bank deposits. MMFs (covered in our last article) are the biggest source of diversification, accounting for between 10% and 30% of corporate cash. We cover the remaining options below.
Every money market fund is doing something you could do yourself given the resources. Buying government bills, bank certificates of deposit and corporate paper, and holding them to maturity.
Going direct removes the fund's fee and the fund's structure risk (no gates, no other investors running for the same exit) but it replaces them with your own operational costs, setting up custody and administration infrastructure directly, sourcing and pricing investments, making your own credit decisions, executing investments and ongoing monitoring.
The other instruments
Treasury bills. Government paper with a maturity of under a year. … read more show less
Instead of paying a quoted interest rate, they are sold at a discount to face value. You receive the par value at maturity, the difference between the two prices is your yield.
High quality sovereign paper is often as close as you can get to the risk-free rate in a given country and they have large, deeply liquid markets. Many government issuers maintain a regular programme of short-term issuances to promote liquidity and price transparency. Although this is not always the case, Ireland for example hasn't issued short-term paper since September 2022.
Where short term issuances are not available, buying longer bonds close to maturity can replicate the same exposure, although with different pricing dynamics and quoting conventions (yield to maturity rather than discounted from par).
Agency and supranational debt. Debt issued by government sponsored entities and major global agencies. … read more show less
Agencies such as the World Bank, European Investment Bank, EU and others regularly issue debt to cover various programmes. Their debt is guaranteed by the member countries, giving you sovereign exposure with an element of diversification, although the exact breakdown and structure of the guarantees and credit support differs.
Short term debt issued by supranational entities also sits at the top of the rating scale, has similar deep liquidity to sovereign programmes and often slightly higher yield. Although the complexity in understanding the credit support mechanisms might put off a corporate investor.
Certificates of deposit (CDs). Bank deposits in tradable form. … read more show less
Unlike a fixed term deposit, a 6-month CD can be sold mid-life if liquidity is required.
Commercial paper. Unsecured corporate IOUs of days-to-months tenor. … read more show less
They are higher risk, so they yield more. Investing in commercial paper needs a genuine credit process and proper diversification.
Liquidity at a price
The difference between all of these products and deposits and MMFs is the mechanism through which you generate liquidity. These are all tradeable instruments, meaning you can sell them at any time to generate funds, but only at the prevailing market rate (and subject to a bid-offer spread).
In the normal course of business for short term investments, the price swings will be small. Drastic credit deterioration, or a sharp rise in rates and rate expectations, are the biggest threats.
What going direct actually requires
A custody account to hold the securities, dealing access (your banks' desks quote all of this), settlement instructions, and minimum ticket sizes that make the round-trip worthwhile. Minimum investments might be $100k or lower, but in practice for the process to be worth the effort (for everyone involved), you need to be investing consistently in the low millions per ticket or you'll find your bank or broker slower to pick up the phone.
It also needs investment and credit policy and committee; responsibility for reinvesting maturities, monitoring issuers, keeping the maturity calendar aligned with the cash forecast, and periodic reporting to keep everyone aligned. And trust. Placing funds with a few approved banks is very different to investing in a universe of approved instruments under a broad mandate. More freedom often comes with more need to justify decisions, and more pressure. If you are broadening your investment policy beyond simple bank products and MMFs you need to ensure that all stakeholders are supportive and the mandate and policy are clearly stated and understood.
When direct wins
Three situations tip the balance in favour of managing your own portfolio:
- Scale At nine-figure cash piles, the fund fees saved start to make funding the process internally look more economic. You don't need a huge team or 300 investments, but it's a big leap, and takes a bit of work to get off the ground.
- Mandate precision Direct investment lets you set the policy. Dictate exactly which issuers and tenors you invest in, and which you don't.
- Segregation Securities in your own custody account are yours in every scenario, with no fund-level structure between you and them. You still have exposure to a custodian, but in a resolution, there is no confusion around ownership or distribution of proportional holdings of a fund, a property that started mattering to people again in 2008 and periodically since.
The same job at three sizes
Start-up. You rarely need to go further than MMFs. … read more show less
The scale that justifies custody, dealing access and a credit process is a long way off.
Established mid-market. The crossover conversation starts when strategic-tier cash sits persistently above the tens of millions. … read more show less
A simple T-bill ladder alongside MMFs is the typical first step after diversified bank deposits. CP credit work is still better left to funds.
Large corporate. Direct portfolios become the treasury team's remit. … read more show less
Managed against investment policy with dealing panels and custody infrastructure, and funds relegated to overnight liquidity duty. At this level, cash is often segmented by purpose:
- Short-term operational cash held in deposits, high rate MMFs and short-term repo.
- Reserve liquidity invested in T-bills, short term fixed deposits, CDs and high-quality commercial paper.
- Strategic cash locked up for longer terms in government bonds and high-grade corporate bonds.