Lower for longer: four options for corporates struggling to find gainful homes for cash

Negative interest rates may be off the cards in the UK, but the low rates seen in recent years show few signs of letting up. 

Against a backdrop of structurally lower interest rates, which are unlikely to lift higher any time soon, many companies are struggling to generate yield on their cash deposits. If we are to follow consensus, the Bank of England (BOE) plans to keep the policy rate at historic lows (0.1%) despite writing off negative rates in the near term. GBP SONIA is marginally positive, and UK Treasury Bills auctions have until just recently been issuing in negative yield territory across all tenors.

Regulatory pressures on bank balance sheets have also made holding short-dated deposits with UK banks rather expensive. UK banks are required to hold high-quality liquid assets (HQLA) as a liquidity buffer (LAB) against deposits held in short tenors in order to meet liquidity coverage and adequacy metrics, resulting in higher costs.

So, what are the alternatives? Here are a few options – beyond short term vanilla deposits and money market funds – you may want to consider as you revise your investment mandate to include a broader range of acceptable products.

Triparty repurchase agreements: back on the agenda

Triparty repurchase agreements are back on many corporate treasurers’ agenda. These repurchase agreements or repos – where one party sells an asset to another with a promise to repurchase at a specified date – allow companies to borrow a diverse basket of assets at different tenors, usually from a day to one month, with security selection optimised for yield, liquidity and duration appetite.

Corporate treasurers have historically found this market difficult to enter due to expensive legal costs and lengthy agreement negotiations, but it is now far more accessible with the introduction of standardised legal documentation offered by large international depositories like Clearstream and Euroclear (typically the ‘third party’ in triparty repos).

Alternative deposit solutions: evergreen & ESG-linked options

Many corporates are looking to invest a portion of their cash for longer to enhance the yield they can achieve – while also maintaining a level of liquid funds to satisfy cash and cash equivalence (C&CE) rules.

Some have turned to placing funds into evergreen-style deposits –  a short-term deposits with a notice period, effectively leaving the principle funds outstanding longer-term. There is a vast improvement in rates offered to companies whose investment maturities extend beyond three months, and banks can pass on higher rates in the form of enhanced yield.

As managing environmental, social & governance (ESG) risk becomes a more prominent fixtures in the corporate agenda, more companies are turning to ESG-linked deposits to achieve their sustainability targets. By extending the tenor of these investments, companies can enjoy enhanced yields while investing in areas increasingly important to them and their investors.

Uncollateralised securities lending: using banking regulations to generate yield on government bonds

Many companies already invest in government bonds, often held until maturity, and the need for banks to hold HQLA creates an opportunity for corporate treasurers to increase the yield on those they hold. Companies can lend these assets to banks for a fee, a balance sheet-efficient way for banks to raise HQLA and satisfy their LAB requirements, generating additional returns on those bonds in the process.

Dual currency investments (DCI): for companies with a natural business fit

DCIs are popular because they are flexible, allowing companies to keep their cash investments short-dated while attracting high yields. As the name suggests, they’re linked with the currency market: companies place a deposit in one currency and receive their investment back in one of two currencies, determined by the exchange rate at maturity.

That said, DCIs aren’t for everyone – but they may be attractive for companies with a natural business need to convert one currency into another.

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