Liquidity solutions – balancing diversification, yield and risk control

April 2023 | 2 min read   

Liquidity solutions – balancing diversification, yield and risk control 

When it comes to cash management, there is quite a variety of solutions available in the market to choose from.  

Government bonds, certificates of deposit, commercial papers and bank deposits are among the most common options available today. Therefore, we are now going to analyse these alternatives considering five criteria: liquidity, security, consistency, yield and diversification. As illustrated in the graph below, for the other options only one or two criteria clearly stand out.

High-quality government bonds are particularly liquid due to their market size and considered safe as backed-up by governmental authorities, but, despite consistent over time, the yields and returns they have delivered in the last decade haven’t been particularly attractive.

Certificate of deposits sold by banks and credit institutions and commercial papers are aimed to cover short-term funding needs of a single issuer, resulting in no diversification. Moreover, commercial papers are offered only by a selected number of large companies and are unsecured, as they are not backed up by any form of collateral.

Bank deposit rates have slightly increased recently, but they are still not particularly attractive due to the decade of ultra-loose monetary policy. Additionally, in case of bank liquidation, deposit guarantee schemes can reimburse only a limited amount of money to compensate clients: for instance, under EU rules, depositors are protected up to 100.000€.

Liquidity solutions, in our opinion, provide the best combination as they satisfy all the aforementioned criteria. Due to their investment universe, they represent one of the less risky options available today; their market size allows a high level of liquidity, which can be beneficial in periods of heightened volatility. Additionally, these solutions offer a diversification* potential by complementing other asset classes; as yields for this segment have become more attractive lately, they can enhance positive returns in investors’ portfolios.