After nearly 10 years of a low and static rate environment, interest rates rose during 2017 and 2018. Now, uncertainty is increasing due to escalating geopolitical trade tensions and concerns around a slowdown in U.S. and global growth. As a result, management of cash investments has become more complex in an environment of uncertain interest rates.

Public finance entities have distinct liquidity objectives and preferences driven by unique cash flows, differentiated oversight structures and collateral requirements. Thus, a bespoke solution, frequently involving multiple products, is often required to optimize outcomes, including yield, principal preservation and liquidity.

Fully evaluating and re-evaluating each of these areas on a routine basis will allow you to continually optimize results.

What Will the Future Hold?

Over the past few months, market volatility has increased, led by broad concerns regarding the long-term economic outlook. The Federal Reserve cut interest rates by 25 basis points in July 2019. Market participants have become more resolute in their tone and actions and believe that additional cuts in both 2019 and 2020 are warranted.

These different scenarios will have dissimilar but significant effects on public finance entities. For example, through a recessionary period, there’s generally a material drop in both charitable donations and tax receipts. And that may influence how you think about how much extra or reserve and/or strategic cash you want to have on hand versus deploying it into certain projects or other expenditures.

However, the future interest rate path is unknown. If the market environment changes and if the yield curve steepens, then you may want to utilize a different set of products to increase yields and will face a different set of tradeoffs to evaluate for each of your sources of cash.

So it is less about chasing yield than it is about structuring your products, your investments and your portfolio in a way that, over time, will enable you to obtain the best short- and long-term results.

Tailoring Your Investments to Your Cash Needs

Think of your cash as being in three buckets: daily operating cash, reserve cash and strategic cash.

  1. Daily operating cash is what you need to operate your entity on a day-over-day, month-over-month basis. Generally, you would use deposit-focused products for operating cash.
  2. You need reserve cash on hand to manage through a disruption in your operations. The amount of reserve cash may change as the market and economics change. There are a number of products available. How you choose is dependent on your organization’s ability to forecast cash flows.
  3. Strategic cash is typically invested for the long term. It may be accumulated over time for a specific use. This might be a major building or scholarship. Or you might plan to support the strength and overall objectives of your organization through longer-term investments. Given that your investment horizon is much longer, you might consider using a mix of fixed income securities and long-term tenor deposit products to deliver increased yield.

Real-World Examples

Example 1 — Duration Match Investment Maturities and Fund Usage: You may get a large inflow of cash at one time, such as a sizable donation or a grant, but need to spread your use of that cash over multiple periods. You may have historically put this money into a money market deposit account or a money market fund. However, you can consider breaking that large donation into individual investment pools to match the timing for when the funds need to be used, which might increase yield by adding duration.

Example 2 — Leverage Your Line of Credit: You have uneven cash flows throughout the year, driven by items such as tuition payments, grants and tax receipts. You may want to optimize cash flows by investing for increased return by extending the investment horizon, and employing bank credit products during trough periods. For example, you could purchase fixed income securities and rely on your revolving line of credit to fund short-term needs during your seasonal cash trough period.

PNC offers a full range of products to meet the specific liquidity needs of public finance entities and can tailor a program to help you maximize your returns. For more information, please contact your Relationship Manager.