Corporate liquidity is here to stay--for now.

• Author: Pozin, Chrystal
• Position: Treasury

In 2005, U.S. corporate liquidity reached an all-time high of $5 trillion. This $5 trillion represents all bank deposits (interest and non-interest bearing) and short-term investments with maturities of less than three years held by corporations and public sector organizations. The big question for 2006 and beyond is whether this level of liquidity is sustainable. Will companies continue to hold large amounts of cash and short-term investments, or will liquidity levels drop as companies put these funds to different uses?

In 2005, Microsoft Corp. used its $50 billion liquidity portfolio to make dividend payments to investors. Will other companies follow suit by deciding to reduce liquidity levels to reward investors, make capital investments or pay down debt?

In a recent survey of over 600 companies conducted by Treasury Strategies Inc., 70 percent of participants indicated that they expect liquidity levels to either increase or stay the same in 2006. With liquidity portfolios remaining at such high levels, are companies prepared to maximize their return on short-term cash?

This year, companies will likely refocus their efforts on managing their liquidity portfolios. The composition of corporate liquidity shifted to investment instruments offering the best returns; however, companies demonstrated gaps in investment policy management, benchmarking portfolio performance and forecasting future cash needs.

Corporate and government notes and bonds accounted for 29 percent of all liquidity in 2005, the largest single piece of liquidity for the year. This shift toward bonds and notes was likely driven by the returns offered and the subsequent popularity of auction-rate securities. Conversely, companies moved liquidity away from both money market and longer-term funds. Fund products fell to 24 percent of overall liquidity in 2005 from 45 percent in 2004; the drop was largely driven by the upward movement of interest rates (returns of funds tend to lag current market rates).

Companies also increased their investments in commercial paper, which saw somewhat of a comeback in 2005 after bottoming out a few years earlier. All in all, companies did move liquidity to maximize returns in terms of the instruments comprising their portfolios. However, they demonstrated other areas for improvement in the processes involved in managing these portfolios.

In 2005, 29 percent of 600 companies reported not having a documented investment policy, as reported in...