Commercial Paper May Help Diversify Risk and Improve Income Potential
A growing number of institutional cash investors seeking higher returns are turning to direct investments in commercial paper. Why? In part because prime money market funds no longer deliver an optimum combination of liquidity, safety and yield as they did in the past. Among other things, the SEC reforms two years ago resulted in a large shift of assets out of prime funds into government funds that do not hold CP—leading to lower portfolio yield potential. Now, corporate cash managers operating in a rising-interest-rate environment are dipping their toes back into direct CP investments that may offer higher return potential.
Our October research report, A Decade of the Commercial Paper Market and its Role in Institutional Liquidity Portfolios, is an in-depth guide to the world of CP investments. It tracks the long-term trends in commercial paper from before the 2008 financial crisis to today. While the crisis threatened to decimate the $2-trillion CP market entirely, federal interventions helped stabilize it at about $1 trillion by 2010. Since then, financial, non-financial and asset-backed commercial paper markets have all started making gradual comebacks. Now, with the end to crisis-era support programs, more prudent financial regulations, and higher short-term interest rates, a resurging CP market appears to reflect a “back-to-the-the-norm” sentiment.
Commercial paper investments may not be a new concept for treasury professionals, but many were exposed to them only through holdings in prime money market funds managed by others. While situations differ from organization to organization, it may now be time for more treasury professionals to seriously consider managing direct investments in top-tier commercial paper, either through in-house accounts or separately managed accounts. And for certain organizations with more appetite for risk, it may even be appropriate to think beyond the stigma associated with “Tier-2” CP ratings and consider certain names in a broad liquidity portfolio to diversify risk and improve income potential.
If the new era of commercial paper seems like a brave new world worth exploring, we hope our October white paper is a useful, comprehensive guide that can help get you started.