US corporations hold massive cash pile, yet cash dips 3% below all-time high

American companies are sitting on piles of cash, and about half that amount (48%) is held as cash and checkable deposits according to The Carfang Group’s analysis of the revised Federal Reserve’s (Fed) Quarterly Flow of Funds report just released.

Corporations continue to maintain the huge cash reserves accumulated during the COVID-19 pandemic. The cash pile stood at US$3.83 trillion in the first quarter of 2022 and is still $1.2 trillion above the pre-pandemic trendline as per The Carfang Group’s quarterly cash bulletin June 2022. Nonetheless, corporate cash levels hover three percent below their all-time high.

According to Anthony J. Carfang, Managing Director at The Carfang Group, “Corporate cash fell by $120 billion during the first quarter from its post-pandemic high set the previous quarter. Companies still harbor concerns about the economy, interest rates and inflation. Corporate treasurers are very worried about the hidden risks that quantitative tightening following the unprecedented decade-long monetary expansion could portend.”

 

Significant shift in corporate cash allocations.

The Carfang Group’s quarterly cash bulletin states that corporate cash allocations have shifted significantly during the pandemic. “While corporate treasury investments into all instruments increased, the percentages varied. For example, domestic checkable deposits and cash grew by $500 billion or 41%. Investments in time deposits and money market funds grew by 32 percent and 33 percent respectively. The ‘all other’ category which includes a variety of direct instruments lagged at 17%. It will be useful to monitor this trend as rates begin to rise,” the bulletin further added.

Nearly half of corporate cash pile held in cash and checkable deposits

Forty-eight percent of corporate cash was held in cash and checkable deposits. This is an all-time high in terms of checkable deposits and currency as a percentage of US corporate cash. According to the quarterly bulletin, this percentage began a long upward trend following the 2008 financial crisis, wherein the Fed expanded the money supply and interest rates remained near zero.

With the Fed announcing its largest interest rate rise since 1994 and additional rate hikes expected in the coming months, it will be interesting to see how rate sensitive these deposits will be.

Time deposits account for 6.9 percent of corporate cash, very close to the all-time low set in the third quarter of 2019. The bulletin reckons that this may be because of persistent low rates resulting from ten years of quantitative easing.

What is also worth observing is that the inverse relationship between time and checkable deposits suggests that there may be an increase in time deposits now, given that interest rates are rising and quantitative tightening has begun.

As per the bulletin, during the first quarter 2022, Money Market Fund (MMF) assets remained in their recent tight range, at 20.5 percent of corporate cash. That level was last seen in March 1997. MMFs invest in highly liquid and short-term debt. These assets are now barely one third of the peak 59 percent level of December 2008, as is mentioned in the bulletin.

Conclusion

The Carfang Group’s analysis concludes with an important reminder that current liquidity markets represent a challenge for both treasurers and bankers. “Although the market is awash in liquidity, the Fed has become such a dominant player that traditionally reliable market signals are both distorted and muted. Inflation, rising short term rates and the beginning of the Fed’s balance sheet reduction are just a few of the wild cards,” the bulletin cautions.