Are you actively managing the interest rate cycle?

After reaching record-high levels not seen in nearly two decades, interest rates across major global currencies have begun or are expected to drop. While a declining rate environment may help improve cash flow thanks to lower borrowing costs, it also means lower yields. Have you assessed the impact of rate reductions to your organisation and is your treasury team prepared to navigate the changing environment?

While it may be difficult for treasurers to predict where interest rates will go next, formulating a strategy to address multiple scenarios relating to the changing macroeconomic landscape can help businesses prepare for uncertainty. Regardless of direction, amplitude, and pace of interest rates movements, there are three key pillars that treasurers can consider when preparing their next course of action, including:

• Centralise and optimise – achieve visibility control and forecasting
• Digitise the treasury toolset
• Create adaptable investment strategies

To ensure centralisation and optimisation strategies are executed in the most agile manner, treasurers need to ask themselves the following questions:

1. Do I have full visibility of balances across currencies and markets?
2. Do I have the means (where regulations permit) to centralise balances from different jurisdictions on an automated basis and do I control how these funds are centralised in real time?
3. Amid a volatile economic environment, can I forecast – to a reasonable degree of accuracy – the working capital needs across the group?
4. Do I have the means to automatically fund short positions across the group, using funds held at a global Treasury Centre, without utilising expensive debt?
5. Does my investment strategy maximise yields on cash without impacting liquidity, and is it adaptable to changing market conditions?

To effectively operate across various phases of the interest rate cycle, the answer to the above questions should be a resounding yes. Whether an organisation is cash rich or not, centralisation plays a critical role in addressing two key objectives, including ensuring all working capital needs globally are met, while enabling excess cash is invested appropriately to optimise yields, or short positions are self-funded to reduce costly external debt.

Once centralisation and optimisation structures are in place, access and speed of execution is essential, and treasurers can tap into an array of digital tools to maximise cash efficiencies. These include:

• Leveraging data tools that deliver real time visibility into global balances, while empowering treasurers to analyse balance parameters to provide granularity – this is key to understanding where the cash is and what it is being used for.
• Utilising self-service digital tools to speed up execution. While centralising funds using automated sweeps has been a longstanding practice, having real time control over sweep behaviours (e.g., suspending them or changing target balances) will allow treasurers to effectively manage cash during periods of rate volatility. Self-service tools will allow treasurers to centrally manage intercompany agreements, set arm’s length pricing, and configure bilateral limits between entities, all in real time.
• Building an accurate view of global balances at various points in the future by ensuring an effective cash flow forecasting process that’s complemented with a robust forecasting tool. Integrating account transactions and forecast data into this tool while ensuring flexibility to allow forecast amendments, will further aid effective working capital planning and facilitate key investment decisions.
• Digital Investment tools are increasingly becoming an essential part of the treasurer's toolkit as they can provide organisations with real time access to investment options, such as Money Market funds that deliver higher returns than on-balance-sheet equivalents. Furthermore, automating the flow of funds into these investments allows treasurers to enjoy higher yields in a straight-through manner and meet earlier fund cut-off times.

While investing excess cash in overnight instruments such as current accounts may have worked in a zero to low interest rate environment, treasurers may want to consider widening their investment options to optimise cash returns in the current landscape. The optimal investment approach will depend on treasurers’ risk appetite and yield maximisation strategy.

Term products with longer tenors pay significantly higher than overnight instruments, with the differential being materially greater amid rising interest rates. For example, banks may deliver higher returns on a three-month term deposit as the market anticipates rates to remain high for this period.

Treasurers may consider placing excess cash into these instruments while ensuring sufficient buffer to meet any short-term working capital obligations. Leveraging powerful cash forecasting tools mentioned earlier can help treasurers determine the right level of excess and operational cash, which is equally important when considering the right investment. Nevertheless, taking a more conservative approach to risk does not have to come at the expense of yield. Treasurers can consider shorter term instruments such as notice savings accounts that offer higher returns than instant access savings, or high yielding AAA-rated overnight money market funds, that can be accessed via intuitive self-service investment portals.

Furthermore, organisations can also use existing products to create less risky investments. For example, laddering your term deposits by staggering maturities can be a great way to enhance yields whilst ensuring that a float of excess cash is available to meet working capital shortfalls, thereby balancing liquidity risk while optimising returns.

Formulating such adaptable strategies that prioritise effective risk management while delivering economic benefits can give stakeholders within the Treasury and Finance functions assurance to take on more strategic decision making, such as increasing counterparty limits, which can open up opportunities for further value-add investments.

A strategy that encompasses the above pillars will provide treasurers with a solid basis to tackle changing interest rates. There are three “what if” scenarios:

If rates remain unchanged at current high levels:

Under this scenario, ensuring daily fund flow into a global this scenario, ensuring daily fund flow into a global Treasury Centre via intercompany sweeps and supported by accurate forecasting can help treasurers effectively define excess cash to be optimally invested into a mix of instruments (based on tenor and counter party limit). Treasurers can tap into digital tools to control a variety of parameters in case the strategy needs to be tweaked, including:

• Sweep frequency
• Target balances to be maintained in sub-accounts
• Amounts to be swept into money market funds
• Intercompany limits, and interest earning and charges rates

When rates start to decrease:

Treasurers may choose to restructure their investment choices based on a choose to restructure their investment choices based on a predetermined “what if scenario”, executed through the use of digitised parameters with minimal impact on KPIs, such as yield, security and liquidity.

Configurations of these investment strategies are made possible by the pillars discussed, but a crucial element remains in selecting a transaction banking partner that understands these requirements and addresses them comprehensively.

With our global footprint, deep knowledge of different markets and rich capabilities, HSBC has worked with many corporates to help treasurers optimise their working capital and liquidity through a number of innovative tools, including:

1. Global Liquidity Solutions that enable centralised treasury structures with minimal disruptions to operations, while enabling treasurers to maximise yield, self-fund and optimise their FX positions. Combined with our Liquidity Investment Solution (LIS) online platform, treasurers can access a variety of AAA-rated Money Market funds across different providers to optimise returns.
2. Cash Flow Forecasting (CFF) service that helps treasurers operationally streamline forecasting complexities and increase transparency of future cash positions, ultimately simplifying the deployment of cash to achieve their strategic goals.

Regardless of where we are in the interest cycle, optimising liquidity is always going to be critical. Partnering with an international bank with global capabilities and local expertise can help you navigate the current complex rate environment while enabling you to drive your business forward.

If you would like further information on the topics, products or solutions mentioned above, please contact your HSBC representative.