Companies look for returns on cash piles as interest rates rise

As US interest rates rise, money-market funds adjust faster than bank accounts, giving companies an incentive to move their cash into those funds for higher returns.

Companies hoarded cash at record levels during the pandemic and deposited large amounts into bank accounts, where it usually yielded little or no return. Low interest rates meant there was little reason to shift to money-market funds, a form of mutual fund that invests in short-term debt securities including Treasury bills and commercial paper.

But that is changing as the US Federal Reserve is aggressively raising interest rates to fight increased inflation. The central bank on Wednesday raised its federal-funds rate by 0.75 percent for the fourth time this year, raising its benchmark rate range from 2.25% to 2.50%.

Amid a rate-hike campaign, yields on money-market funds doubled in June to an average of 1.23% and climbed to a weekly average of 1.36% as of Monday, according to money fund tracker Crane Data. However, banks have been slow to boost returns, as they still have large amounts of cash and do not want to attract more.

“When attractive, near-term options are available, it is becoming increasingly difficult for corporations to stay in bank accounts,” said Mark Cabana, head of the US rates strategy division at Bank of America. of the corporation

Global Research Branch.

Money-market fund assets have soared in recent weeks after declining earlier in the year as companies withdrew cash to pay the Internal Revenue Service and pay other dues. Crane Data said that through Monday, $5.018 trillion was sitting in money-market funds, up $30 billion from the end of June and $58.3 billion from May 31.

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Hewlett Packard Enterprise is one of the companies that enjoys high returns in the money market. Co.

, Spring, Texas-based technology company. “As rates go up, the rate opportunity increases,” said Kirt Caros, the company’s senior vice president of finance and treasurer. “Every dollar counts. If we can achieve additional returns, we will continue to transfer money.

HPE limits the duration of its money-market fund investments to 90 days or less, Mr. Caros said. “These products tend to be very competitive,” he said, adding that the company moves its money as and when needed on a daily basis. “We put that money to work.”

Pharmacy-chain Operator Walgreens Boots Alliance Inc.

Money-market fund holdings were $2.17 billion during the quarter ended May 31, up from $634 million at the end of August. The company declined to comment on the recent increase.

Micron Technology Inc.,

A Boise, Idaho-based chip maker, disclosed $105 million in money-market fund investments during the quarter ended June 2, up from $38 million during the period ended Sept. 2. “Money-market funds are providing better returns than six to 12 months ago, but the current returns are still lower than other short-term options available to Micron,” the company said, refusing to elaborate further.

whirlpool Corporation

Benton Harbour, Mich.-based maker of washing machines and other home appliances, is closely following interest rate moves, said the company’s chief financial officer, Jim Peters. “When interest rates are favourable, we can use money-market funds”, Mr. Peters said.

Bankers and financial-services providers said they saw an increase in corporations’ interest in money-market funds. “I’ve had a lot of client conversations about this,” said Christopher Tufts, global head of portfolio management and trading for the money-market fund business at JPMorgan Asset Management. “Achieving a yield above zero has made the product attractive to customers, especially given the volatility in the broader market,” he said. The bank declined to comment on whether it has increased interest rates on corporate deposits.

Treasurers consider money-market funds to be almost as safe as cash and value the fact that the amount invested remains highly liquid and accessible. Many companies use these funds to park their cash overnight or for a few days, while others go out for several months, said Peter Crane, president of Crane Data.

Keeping cash is incredibly popular with Wall Street today. This is a huge sea change from the way professional asset managers have behaved over the past decade. WSJ’s Dion Rabouin explains why cash is no longer garbage. Illustration: Adele Morgan

Priya Mishra, head of global rates strategy at Canadian investment bank TD Securities Inc., said banks have been slow to pass on higher interest rates to corporate customers, as financial institutions have a lot of liquidity. Ms. Misra said the deposit beta, which helps calculate the interest paid by banks, is projected to be around 5 basis points for the first 200 basis points in the federal funds rate hike, which means companies will have to pay a lot of money. There appears to be little benefit. “A money-market fund will raise the rate in line with the Fed, so there is more of an incentive to move assets,” she said.

In some cases, banks are paying an income credit rate of 19 basis points and a deposit administration fee of 15 basis points, resulting in a net effective spread of four basis points, said Dave Robertson, head of Treasury Solutions at PMC Treasury. Has happened. financial services firm. “We are getting more questions about produce options from our customers,” said Mr. Robertson.

Money-market funds typically don’t pass on interest rate changes immediately, which could provide companies with an advantage if the Fed moves to cut rates next year, as expected by some investors. If interest rates fall, there will be a time lag until yields fall, said Vanessa Hubbard McMichael, head of CPE strategy group at Wells Fargo Securities, which advises corporate and public entities on cash investments.

The bank said its deposit cost rose to four basis points in the second quarter, up from one basis point in the first quarter, primarily driven by its corporate and investment banking division.

The companies will also follow potential changes from the Securities and Exchange Commission, which is looking into a possible overhaul of money-market funds. The regulator is looking at introducing so-called swing pricing, which will result in charges like redemption of funds in cases of significant outflows. An announcement is expected later this year.

improvement and amplification
An earlier version of this article referred to Micron Technologies incorrectly as Micron Technologies. (corrected July 27)

write to Nina Trentmann at Nina [email protected]

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