Stocks With Longer-Dated Holdings Bet on Fed Cuts

Corporate treasurers are starting to shift their cash strategies, moving more of their reserves into longer-dated securities in anticipation that the Federal Reserve’s expected rate cuts will make those assets more rewarding.

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Data from Clearwater Analytics, an investment software provider, shows that by the end of August, companies had trimmed their average allocation to cash and other liquid vehicles like money market funds to 27% of portfolios. That’s about 13 percentage points lower than levels at the close of 2022, when the Fed began its aggressive rate-hike cycle.

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At the same time, corporate allocations to U.S. Treasuries with maturities longer than 90 days have climbed to their highest point since 2018. Companies have also lifted their exposure to corporate bonds to a three-year peak. Clearwater’s figures, which represent $1.6 trillion in holdings across 800 mostly U.S.-based firms, highlight a growing preference for yield over pure liquidity.

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Even with this pivot, portfolios remain fairly conservative, with average durations of just over six months. But the willingness to extend maturities underscores how cautious corporate finance teams often reluctant to embrace risk are nonetheless preparing for a shift toward lower interest rates.

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Markets currently anticipate at least two quarter-point Fed cuts by the end of the year, starting with one widely expected at next week’s meeting. Shorter-term yields would likely fall faster than longer-dated ones, making duration extension an attractive play.

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“The companies that locked in yield and duration six months or a year ago are outperforming peers,” said Matthew Vegari, head of research at Clearwater. “It might not be the flashiest source of income, but it’s one of the simplest ways to boost returns.”

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Several high-profile companies have already reshaped their investment mix. Workday Inc., the California-based HR software provider, cut its money market exposure by 19% to $802 million between January and July while boosting its corporate bond holdings 12% to reach $4 billion, according to filings.

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Amazon.com Inc. also trimmed its money market funds significantly slashing them by more than $10 billion in the first half of the year to $18.1 billion while raising its corporate debt stake by roughly $1.7 billion to $52.6 billion.

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Uber Technologies Inc. made an even more dramatic move, cutting its money market investments by 77% to $434 million while simultaneously increasing its bond holdings, keeping its overall asset base steady.

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Amazon and Workday declined to comment on the strategy shift, while Uber did not respond to requests for comment.

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“If we get a return to lower rates and a more typical upward-sloping yield curve, more companies will revert to extending duration and taking on marginal credit risk,” said Joseph Neu, CEO of treasury advisory firm NeuGroup.

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Beyond traditional bonds, private placements are starting to capture attention. Clearwater’s dataset shows companies have nudged 1% of their portfolios into privately placed bonds this year, up from nothing previously.

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Though still a small slice, the move signals an openness to alternatives that offer higher yields in exchange for lower liquidity and greater oversight, since private issues lack the pricing transparency of public debt.

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For treasurers, the challenge of falling rates is straightforward: lower yields mean the returns on cash balances diminish. According to Clearwater, corporate cash returns peaked around 6% last year on a trailing 12-month basis, but have already begun to slide.

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That’s a sharp turnaround from 2022, when returns were negative until the Fed’s hikes took effect. On the flip side, lower borrowing costs could ease the burden on highly leveraged companies by allowing them to refinance debt at cheaper rates.

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It’s worth noting that reduced cash levels may not be entirely tied to investment strategy. Some firms could be holding less liquidity simply because their projected funding needs have shifted.

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And while some treasurers are adding duration, most remain in relatively short-dated assets just at the longer edge of that spectrum. Clearwater data shows an average portfolio duration of about eight months, the longest in three years but still conservative.

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The broader trend, however, is clear: as rate-cut bets build, companies are steadily moving away from cash-heavy positions. “Over the last year, investors have wanted to lock in yields of 4.5% to 5% for as long as possible,” said Rich Mejzak, global head of investments at BlackRock’s cash management arm.

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“They weren’t worried about market swings or unrealized gains and losses. The mindset was simple maximize income and lock it in while the opportunity lasts,” he added.

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