On Thursday, TMANY, the Treasury Management Association of New York, hosted a virtual segment entitled, "Cash Investment Themes in Uncertain Times" featuring speakers from Morgan Stanley Investment Management. The description says, "Cash levels are near all-time highs with overnight rates near all-time lows. What to do now? We will discuss everything from COVID-19's impact on the market, Federal Reserve stimulus, and the zero/negative interest rate environment." We review comments from the webinar below. (Note: Please join us for our next online event, Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which will take place Thursday, Sept. 24 from 1-2pmET. Register here: https://register.gotowebinar.com/register/1404567139793203980 for the free event.)

Morgan Stanley's Brian Buck comments, "We wanted to spend the remainder of our time on investment best practices and just talking to you about how to implement these things, or how to think about the general concepts of your investment options. [M]any of you we know are going to be invested in bank deposits and government funds, and that's sort of the foundation for most high-quality cash investors. But for those of you that are interested in looking for yield, for those of you with more stable cash balances, we'll sort of walk you through what to think about, or how you need to think about it."

He continues, "As we mentioned, now that rates are as low as they are and people have as much cash as they do, we think it's all the more important to be efficient with your cash and at least review and 'kick the tires' on the options. The three tracks we've seen during Covid.... You hunker down and get more conservative. You stay with what you've been doing. Or, we've actually had a growing amount of clients come to us and say, well, OK, now that I have so much more cash, I need to look at some new options or be a bit more flexible than in the past."

Buck tells us, "Everything really, comes down to the three options … bank deposits that you all know; commingled funds, that includes money market funds, bond funds, private funds; and direct securities, that's just going out and buying individual securities, whether it's treasuries or commercial paper, on your own. That could be done through a brokerage account. It can be done through a separate account with an asset manager, things like that. That's really the general approach that a lot of investors are taking."

He states, "When you look at the pluses and minuses of each, that's where you have to figure out what fits best with your needs. Clearly with bank deposits, it's really hard to argue with their liquidity and ease of use. It's just the other products can give you a little bit more flexibility when it comes to yield if you have a slightly longer time horizon. When you get into buying direct securities on your own you can customize and take whatever risks that you are comfortable with."

Buck says, "On A2/P2 [commercial paper], it's sort of the unloved sector, and that's why yields are attractive for usually pretty high-quality names. That's because it's just not easy for you to go to the powers that be and say, 'OK, let's go buy some A2/P2 commercial paper.' Because again, you all have day jobs. Your day job isn't to do the credit work on potentially A2/P2 issuers you might want to buy.... So, there's a lot of dynamics that go into it. And then there's a lot of people that have a little bit of perhaps past history with going into credit products that may color their views on all this."

Morgan Stanley's Jim Crowley adds, "I think looking back in the February, March, April timeframe, all the calls that we were receiving were basically investors looking for capacity in Government and Treasury funds. Yield was certainly not something that anyone was really thinking about or looking to optimize in any meaningful way at that time. There were just way too many unknowns in the market. That was like the initial flood, it was all into these risk off trades."

He tells the TMANY webinar, "Fast forward six months, which is not a long time, but a lot has happened between now and then. The observation I've had recently is that a lot of our institutional investors are at minimum 'kicking tires' on yield opportunity.... Government funds are down to a single basis point, prime funds are hovering around 15 or 20 basis points, ultra short, short duration strategies, may be somewhere around 40 to 50 basis points. So, investors are starting to come to us and say, hey, 'What are our opportunities in a somewhat risk adjusted framework that we can potentially look to get a little bit of incremental investment income?' Particularly for the more strategic type cash that they're sitting on today.... If you're willing to take a step out, maybe 30 days or so ... there is some incremental yield to be had."

Buck also comments, "If you're like many of our clients that at least want to kick the tires on this, the way to think about it is concentrating on a couple things. As Jim referenced, cash segmentation is something we always talk about and different people do it different ways. Some people have one cash bucket because they need everything liquid. Other people have four or five cash buckets because they have a very sophisticated cash flow forecasting model and a huge amount of cash.... Most people are somewhere in between, where maybe you have two or maybe sometimes three cash buckets."

He explains, "It really comes down to thinking about what you need at the ready to be spent or put to work, so really anything you're going to use cash-wise in the next month or so…. We usually put the first daily liquid bucket as cash you need in a couple of weeks to a month's time…. That's money that you're going to want concentrated in, again, the bank deposits and the government money market funds, the daily liquid stable value products.... Those investors that have longer term cash have the ability to cash flow forecast and the ability to identify a bit of a longer time horizon. That's where the opportunities arise for other products. A little bit more flexibility in terms of what else is out there."

Buck states, "[This second option] introduces high quality credit for the first time. That tends to come with a floating price. So, whether that's a Prime money market fund with a floating NAV, whether it's an ultra short bond fund or an ultra short duration strategy, that typically comes with a floating NAV, this introduces some products that can get you a blended yield on your portfolio well in excess of the first option. This could get you to a blended yield somewhere in that 25 basis point range if you limit your stable value products to maybe half or a third of your overall portfolio and you look at the higher yielding, high quality credit options for the other. This tends to be a good blend of the goals and objectives we looked at earlier."

He adds, "Option three is really close to what we put on here, separately managed accounts. But it doesn't have to be that. It could be you just going out and, Joe, as you referenced, maybe you spying a little bit of A2/P2 here or there, or maybe it's buying some Treasuries in combination with some high-quality commercial paper."

Finally, Buck comments, "When you look specifically at products, Prime money market funds are a really popular option.... The downside of prime money market funds is the fees and gates that were put in place by the S.E.C. back in 2016. So that's something you're going to need to get your accounting department, or your investment committee, or your CFO comfortable with. I think finally, if the fees and gates are a hindrance for people, or if perhaps if yield is something you're looking for, there are other options, like ultra short bond funds, or coming up with a package of securities on your own."

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