For organizations that have built up excess cash on their balance sheet, today’s interest rate environment calls for a review of short- to intermediate-term investment opportunities.
We haven’t seen rates this high across the yield curve in nearly two decades. As a result, institutional investors may be well served by taking a fresh look at their status quo investment choices.
New Opportunities
The Federal Reserve’s inflation-fighting efforts have boosted the federal funds target rate a full 500 basis points since March 2022, creating a sea change in fixed-income yields, with both short- and intermediate-term alternatives offering 4%-plus.
A couple of years ago, most fixed-income instruments were yielding below 1%, so investment strategies focused more on risk control than returns. In contrast, the current rate environment has opened a window to pursue two distinct opportunities.
First, you can seek to enhance returns on your cash investments by utilizing an array of fixed-income strategies as alternatives to traditional bank deposits and CDs, without giving up safety or liquidity. Second, considering most economists are forecasting the Fed will start lowering rates later this year, an even greater opportunity might be investing in fixed-income instruments farther out on the yield curve, locking in today’s advantageous rates for 2-to-5 years or longer.
Expand Your Investment Menu
Institutional investors can expand their menu of options to include a wide range of investment grade, short- and intermediate-term securities. These can include U.S Treasury securities (“Treasuries”) and agency bonds, as well as high-grade corporate bonds and commercial paper.
Fixed coupon bonds will generally provide higher investment income than cash or money market funds in future periods should expectations that rates are headed down later this year come to fruition. Also, if you invest a portion of your cash on a longer-term basis, you could eventually realize some price appreciation on your securities.
Who Can Benefit the Most?
The organizations that would benefit most from revisiting their cash investment strategies are those that regularly maintain significant cash reserves. Good examples include commercial contractors that are required to maintain cash reserves for bonding purposes and insurance companies.
Another great candidate for an investment review would be a company that has built up cash on its balance sheet in anticipation of a yearlong or longer capital project and will be holding much of that cash in reserve throughout the life of the project.
If your organization fits any of these descriptions, and you would like to take a fresh look at how to optimize your cash allocation, you should seriously consider professional portfolio management.
Professional Portfolio Management
A professionally managed portfolio of investment-grade securities can provide your cash management program with additional opportunities.
If you have been managing your organization’s cash investments on your own, Hancock Whitney’s Institutional Trust and Asset Management group can guide you in retooling your investment program in response to the new opportunities afforded by today’s higher rates and the outlook for Fed easing. Our team can help you evaluate your overall cash management program, and then tailor and implement a comprehensive solution to maximize your yield.
There is a window of opportunity here for organizations to take steps to maximize cash investment performance, but given the rate outlook, that window could be closing soon. To learn more about our professional portfolio management services, contact Institutional Trust and Asset Management at 800-651-9227.
The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
Hancock Whitney Bank offers investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is a wholly owned subsidiary of Hancock Whitney Corporation.
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