Solving the short-term investment dilemma.

• Author: Keenen, Bruce G.
• Position: Treasury

Cash on hand and lower interest rates. It's a corporate treasurer's dream. But as the adage goes: Watch what you wish for because you just might get it.

Maximizing short-term returns with interest rates at record lows can be a real dilemma for corporate treasurers. The questions persist: How can excess cash can be put to productive use? Can meaningful positive returns be generated while maintaining a liquid position so that cash can be converted into longer-term investments when business conditions improve? Corporate treasurers are finding answers by thinking creatively and partnering with their financial institutions to learn more about non-traditional investment vehicles.

Despite some interest rates trending upward recently, inflationary pressures have remained modest, and the Federal Reserve is expected to keep rates low. Forecasters for the National Association for Business Economics (NABE) recently predicted the Fed would not raise rates until the summer of 2004, at the earliest.

Furthermore, while longer-term rates may be more attractive farther out on the yield curve, today's sluggish and uncertain economy dictates a more liquid position to cover unforeseen expenses, if and when they arise. Thus, many corporate treasurers are reluctant to tie up their cash for a long period of time.

Adding to the challenge, due to the slow economy, many corporations have abundant cash on hand, just waiting to be put to work. In better economic times, this cash could be invested in a number of productive business uses, such as expanding inventory or upgrading equipment. In many of today's corporations, however, business conditions do not warrant such investments.

The good news is that several short-term cash management alternatives exist that provide a solid combination of returns, liquidity and other economic benefits. While somewhat basic approaches, they can fit into an overall strategy. These include money market savings accounts and overnight sweep accounts, and treasurers can select whichever of these vehicles fits best with their company's investment policy guidelines.

Money market savings accounts can offer higher yields than other short-term investments. In addition, money market accounts provide full liquidity and the security of being insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).

Sweep accounts, including the automated repurchase investment account and the euro investment sweep, are attractive investment...