04 Aug 2022 2 min read

Putting cash in its place: segmentation in a rising yield environment

By John Wherton , Ross McDonald

Rising interest rates and inverted yield curves mean investors are looking to their cash allocations for more than the familiar stability and liquidity. But how should investors consider optimising returns?


Now is an interesting time to be a money market investor. That’s someone who makes short-term investments in securities that have been yielding close to zero (or less) for several years now. However, this year, that picture has started to shift.

In part one of this two-part series, we look at cash segmentation before discussing some of the options available to investors.

Rising rates, rising interest

It’s true that cash investors have had to contend with ultra-low interest rates for an extended period. However, now the tightening of monetary policy on the one hand, and inflationary pressure on the other, has made some investors reconsider the structure of their cash investments.

The path of policy rate increases, implied by overnight index swaps, has steepened significantly over the past year, prompting an increased focus on potential return for those investors who can stay the course over a slightly longer term. Of course, not everyone can remain invested, and cash requirements can be uncertain.


Peeling back the segments

Enter cash segmentation. Its objective is to optimise return within the context of an investor’s specific liquidity and capital stability requirements.

It’s important to consider those liquidity and capital stability needs first (accurate cash forecasting for treasurers, or optimal collateral buffers and payment schedules for pension schemes or insurers) to identify an allocation outside of day-to-day requirements. This can enable investors to segment their cash into ‘operational’, ‘reserve’ and ‘strategic’ buckets:

  • Operating cash: requires same-day access for day-to-day needs and should be held somewhere that prioritises liquidity and capital stability ahead of yield
  • Reserve cash: is not immediately required but could be called upon when necessary. A typical investment horizon would be six to 12 months
  • Strategic cash: has a longer investment horizon, generally over 12 months, with some predictability over when cash will be required

These allocations can also change over time (as illustrated below) as reserve or strategic cash is drawn on to top-up operating cash balances and vice versa.


Finding the right balance

Good cash management is all about having the right amount, in the right place, and at the right time.  As interest rates rise, many investors will be looking to capture additional returns. But it’s not just about returns – investors need to consider their time horizons, stability and liquidity needs first.

Now you’ve segmented your cash, what comes next? Part two of this blog will look at some options and important considerations to bear in mind for operating, reserve and strategic cash allocations.

John Wherton

Head of Liquidity Management, Global Trading Team

John leads Liquidity Management at LGIM which incorporates liquidity and short duration portfolios as well as securities financing. John joined LGIM in 2002 and since 2008 has been managing money market funds and supporting the development of LGIM’s liquidity management capability. Prior to 2008 John worked within Front Office Technology and Global Credit teams. John holds an MSc in Management from the University of Bath, Certificate in International Cash Management (CertICM), and is a CFA charterholder.

John Wherton

Ross McDonald

Liquidity Investment Specialist, Global Trading Team

Ross is an investment specialist within the Liquidity Management team. He joined LGIM in 2021 from Goldman Sachs Asset Management, where he was an executive director in the Liquidity product strategy team. He began his career at Deloitte where he qualified as a chartered accountant. Ross holds a MA in Accounting and Economics from the University of Edinburgh and is a CFA charterholder.

Ross McDonald