The Association For Financial Professionals, a group representing corporate treasurers, published its "2022 AFP Liquidity Survey earlier this week. (See AFP's press release and our June 15 Link of the Day, "AFP Releases Liquidity Survey.") The cover letter to the report says, "Invesco is proud to once again partner with AFP to sponsor the 2022 AFP Liquidity Survey, the 17th annual exploration of current and emerging corporate cash management trends. This marks the third year Invesco has underwritten this informative research, and what a remarkable period it has been in liquidity markets, from the early pandemic days in 2020 to the sharp inflation acceleration and aggressive shift to Federal Reserve monetary policy tightening in 2022." (Note: For those attending our Money Fund Symposium next week, June 20-22, in Minneapolis, conference materials are being posted to our "Money Fund Symposium 2022 Download Center." See you all in Minnesota on Juneteenth!)

Invesco's Laurie Brignac explains, "This year's survey identified several interesting high-level themes: Corporate liquidity reserves remain near record highs, though companies are generally beginning to plan on putting this cash to work. Companies are broadly preparing for higher interest rates, with markets pricing in a very aggressive hiking cycle. Caution around event risk remains high, elevated by uncertainties in geopolitical, inflationary, supply chain and labor pressures as companies adjust to higher rates and implement a return to the office."

The Introduction to the Comprehensive Report tells us, "A smaller share of organizations compared to last year plan on building cash reserves -- 37 versus 47 percent -- suggesting companies are being cautiously optimistic while shoring up liquidity to ease uncertainty. However, organizations are still heavily reliant on banking partners. Fifty-five percent of survey respondents indicate that their organizations' cash and short-term investment holdings were being maintained in bank deposits -- the highest figure since 2017 and an increase from the 46 percent reported in the 2019 survey report and the 51 percent in the 2020 survey. Looking ahead to the second and third quarters of 2022, 55 percent of respondents expect that their organizations' cash and short-term investments will be unchanged, while 27 percent anticipate an increase and 18 percent expect a decrease."

It continues, "With the Federal Reserve expecting to raise interest rates to curb inflation, a majority of organizations (57 percent) is preparing their portfolios ahead of the anticipated rate increase. They are employing various methods to do so, with one-third of respondents indicating they are preparing by managing the duration of their companies' portfolios. Some are also considering investing in floating rate notes, creating bond maturity ladders or using a barbell approach with select securities."

Discussing "Cash and Short-Term Investments/Securities," the AFP says, "A significantly smaller percentage of respondents report an increase in cash and short-term balances over the past year, suggesting that organizations are being cautiously optimistic and less constrained than they were in 2021. Thirty-seven percent of corporate practitioners report an increase in their organizations' cash holdings within the U.S. in the past 12 months -- 10 percentage points lower than the 47 percent reported in the 2021 AFP Liquidity Survey, but still 6 percentage points higher than the 31 percent reported in the 2020 AFP Liquidity Survey. Last year's percentage was the highest share ever reported in the 17 years AFP has been tracking this data, likely due to caution caused by the pandemic."

They write, "Fifty-seven percent of respondents indicate that in the past 12 months (through March 2022) their organizations' investments outside the U.S. were unchanged -- similar to the 58 percent last year. Thirty-three percent report an increase in cash and short-term balances, slightly higher than the 31 percent in last year's survey. Ten percent report a decrease -- lower than the 11 percent in last year's survey.... Sixty-two percent of organizations hold some amount of cash outside of the U.S. -- similar to the 64 percent reported last year."

AFP continues, "[T]he majority of cash and short-term investments held outside the U.S. is in U.S. dollars (50 percent), indicating that most companies are USD functional or choose to hold USD as a safety measure. The Canadian dollar and the Euro are the next most popular currencies held by organizations outside the U.S. (24 percent and 19 percent, respectively).... Nineteen percent of organizations' cash and short-term investments outside the U.S. are held in 'other' currencies including the Mexican Peso, Brazilian Real, Indian Rupee, Australian Dollar, Swedish Krona and Thailand Baht."

The survey also tells us, "Changes in cash holdings are driven by various factors. Thirty-nine percent of survey respondents report that increased operating cash flow has had a significant impact on the increase in their organizations' cash holdings in the past 12 months (ending in March 2022).... Other drivers contributing to increased cash holdings at organizations include pandemic planning and contingencies (cited by 60 percent of survey respondents), increased debt outstanding/accessed best markets (41 percent), government stimulus (40 percent) and acquired company/subsidiary and/or launched new operations (31 percent)."

On the topic of "Objectives of Cash Investment Policy," the survey says, "Organizations are continuously working to balance their desire for safety and liquidity against a competitive rate of return. Safety continues to be the most-valued short-term investment objective for 63 percent of organizations -- an increase of one percentage point from last year's survey. It isn't surprising that organizations are continuing to choose safety over liquidity given the uncertainty in the economy due to high inflation rates, anticipated actions by the Federal Reserve and geopolitical developments. Thirty-four percent of survey respondents indicate their organizations' most important objective is liquidity -- slightly higher than the 32 percent reported in 2021, but equal to the 34 percent reported in 2020. Yield continues to be the least important objective of an organization's cash investment policy. The share of organizations ranking yield as most important has decreased by three percentage points -- from 6 percent in 2021 to three percent in 2022."

AFP comments, "Over 50 percent of organizations with investment policies call out and/or separate cash holdings used for day-to-day liquidity from the rest of the company's cash and short-term investment holding -- a one-percentage-point decrease from last year. Those policies include guidance stipulating the amount of cash holdings that is set aside for day-to-day liquidity versus other uses.... Thirty-two percent of financial professionals report that their organizations have neither a percentage nor a dollar limit on short-term investment holdings by asset manager or fund. Seventeen percent of companies impose dollar limits while 32 percent restrict short-term investment with percentage limits; the remaining 19 percent have a mix of both dollar and percentage limits."

They also state, "A majority (83 percent) of organizations' investment policies requires money market funds be rated. Thirty-nine percent of organizations require at least one agency rating assign a AAA rating and 28 percent mandate that their money market funds earn a AAA rating from at least two agencies.... For the majority of respondents -- 82 percent -- the primary/preferred rating agency for money funds is S&P. The second most preferred primary/preferred rating agency is Moody's (59 percent) followed by Fitch (29 percent)."

AFP explains, "The typical organization currently maintains 55 percent of its short-term investments in bank deposits, slightly higher than the 52 percent reported in 2021 and 51 percent in 2020. This allocation also represents a 9-percentage-point increase from 2019 and a 6-percentage-point increase from 2018.... When interest rates dropped to zero at the beginning of the pandemic in the spring of 2020, bank relationships were key as organizations needed to draw down on liquidity. In the last 12 months there have been signs of recovery. With inflation relatively high, the Federal Reserve has already raised interest rates. Treasury professionals will continue to rely on relationships with their financial institutions as low yields provide little appetite for companies to move away from bank deposits. Companies maintain their investments in relatively few vehicles. Organizations invest in an average of 2.5 vehicles for their cash and short-term investments -- a figure unchanged from the 2.5 reported in 2021."

They add, "The majority of organizations continues to allocate a large share of their short-term investment balances -- an average of 81 percent—in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. This is the highest figure on record since AFP began tracking the data. The allocation to Government/Treasury money market funds is 14 percent, three percentage points lower than the 17 percent reported in last year's survey. The likely driver behind a 10-year increase from 2012 is likely due to money fund reform. AFP now tracks two categories in its liquidity survey series: Government and Prime funds. As companies feel the need for stronger safety (Stable Nav + underlying securities) they've moved into government money market funds as their second vehicle of choice."

Finally, AFP comments, "[A]nticipated changes in investment mix are more likely to be observed in bank deposits; 23 percent of respondents anticipate an increase and 22 percent expect a decrease. Other investments likely to be impacted by shifts in an organization's investment mix are Government/Treasury money market funds and Treasury bills. As stated earlier, the increase in the investment mix towards bank deposits and Government/Treasury money funds not only reflects a flight to safety, but also as money funds durations shrink, there is additional yield to capture as rates are expected to increase and the shorter maturities will capture the rise in rates more quickly."

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