EuroFinance

The financial landscape is marked by rapid shifts and uncertainty, with interest rate volatility posing one of the most significant challenges for treasury professionals today. This dynamic environment requires treasurers to employ a blend of foresight, analytical rigor, and adaptability.  From managing hedging strategies to aligning cash investments with business needs, treasury leaders are rethinking conventional approaches to navigate this complex landscape effectively. At the EuroFinance International Treasury Management in Copenhagen, treasury leaders reveal how organisations adapt to these challenges, leveraging a mix of conservative policies, dynamic hedging, and innovative technologies to stay ahead.

Higher-for-longer interest rate and cash management

Interest rate volatility can have cascading effects on balance sheets, borrowing costs, and overall liquidity. For organisations like Parexel, a leading global provider of biopharmaceutical services, such as clinical research and consulting to help life science companies transform scientific discoveries into new novel treatments, strategic planning is critical. “Managing or navigating a high or volatile interest rate environment requires a blend of strategic foresight and a diversified risk management strategy,” said Sekar Sundaram, vice president and treasurer.

“We constantly monitor macro-economic indicators like GDP growth, inflation metrics, monthly NFP reports, and corporate profits, as well as central bank policy statements. These can give us insights into potential interest rate movements and indications of future policy shifts from entities such as ECB, the Fed and BoE as they fine-tune their monetary policy in a delicate balancing act to achieve price stability as well as maximum employment This allows us to make timely adjustments to our hedge strategies ,” Sundaram said.

This focus on adaptability is echoed by Meindert de Vreeze, EMEA treasurer at 3M, a diversified manufacturer of industrial and consumer products. “It’s important to look at cash from a broader balance sheet perspective. Aligning assets and liabilities, especially with regard to upcoming debt maturities or specific events like M&A, ensures that treasury decisions are integrated with overall business needs,” he explained.

De Vreeze further highlighted the importance of segmentation in cash management. “We divide our cash into three buckets—operational cash for daily business needs, reserve cash for unforeseen events, and discretionary cash where we can extend the duration without taking on additional risk,” he noted. This segmentation allows 3M to maintain liquidity while optimising returns.

Fixed v floating: strategic decisions

The debate over fixed versus floating-rate debt remains a central issue for treasury teams. Sundaram explained Parexel’s approach: “We evaluate a variety of core interest rate derivative instruments such as swaps, caps, collars etc to limit our exposure to rate changes, depending on the market outlook, our risk tolerance and optimisation goals.”

“These hedging options provide different levels of risk protection, cost and flexibility; for instance, caps can act like high-deductible insurance plans, offering disaster protection with minimal upfront costs and is preferred, if we believe the current forward yield curve may be over projecting the path of future rates that will materialise and hence want a conservative risk management option,” he added.

Giuseppe Amodio, co-head of Treasury at STMicroelectronics, a semiconductor company that designs and manufactures a wide range of microchips and sensors, added “Our treasury policy is designed for resilience. It emphasises capital preservation by investing in highly secure instruments like US government bonds, fixed term deposits and money market funds,” he explained. “We don’t gamble with treasury; the main purpose of our treasury policy is mitigating financial risks, not speculating on those.”

Amodio however points out the role of flexibility, always remaining within policy guidelines. “In this environment of rising rates, we can adjust the duration of fixed term deposits or shift versus a portfolio with a higher percentage of government bonds with longer maturities. This lets us respond to changing market conditions without compromising our conservative principles,” he added.

Responding to market volatility with dynamic hedging

Volatility demands agility and precision from treasury teams and sudden shifts in interest rates can render even the most well-considered strategies ineffective.

Sundaram highlighted that Parexel’s real-time data feeds play a pivotal role in staying ahead and gives them the ability to pivot quickly which is crucial in rapidly changing markets. “These tools allow us to track interest rate movements, yield curves, credit spreads and current pricing of instruments, ensuring that our decisions are based on the latest information.

Regular communication with both internal & external stakeholders is also key. This ensures that decision-makers are aligned and can act quickly, if necessary. This continuous, proactive monitoring helps ensure that hedge strategies remain aligned with the company’s risk objectives in terms of effectiveness, cost and coverage,” he said.

The rise of technology: AI and blockchain in treasury operations

Emerging technologies are transforming the treasury function, offering unprecedented opportunities for precision and efficiency.

Sundaram highlighted the potential of artificial intelligence (AI) and natural language processing (NLP) in improving decision-making. “AI-driven tools can offer enhanced analytics, real-time monitoring, and more precise predictive capabilities that can help companies navigate complex financial markets and optimize their hedging strategies. For example, AI can analyse and integrate vast real-time datasets from multiple sources to provide more accurate predictions of future interest rate movements and ideal liquidity timings for trades,” he explained.

“NLP tools can analyse news articles, financial reports, and social media to gauge market sentiment on interest rates, economic policies, and geopolitical risks. By incorporating sentiment analysis into hedge strategy, corporations can anticipate market movements that may not be reflected in historical data alone,” Sundaram added.

Blockchain technology is also gaining traction in treasury operations. Sundaram points to its ability to create immutable ledgers of all hedge transactions, enhancing transparency and auditability. This can be useful for companies with complex hedging portfolios and those that need to demonstrate compliance with regulatory requirements.

“Robotic process automation can handle many of the repetitive and manual tasks associated with hedge execution, such as trade entry, settlement, and documentation. This reduces the risk of human error, accelerates processing times, and frees up treasury teams to focus on strategic decision-making,” he said. As AI-driven tools continue to evolve, they will allow corporations to build more dynamic, data-driven hedging strategies that respond quickly to changing market conditions while minimising costs and maximising hedge effectiveness.  

Cash investment policies: balancing conservation and yield

Conservative cash management policies remain a cornerstone for many organisations, particularly in uncertain economic times. Joanna John, associate director of treasury at BioMarin International, a biotech company focused on rare genetic disease treatments , outlined their approach: “We invest only in US dollar securities with maturities under five years, ensuring stability and compliance with our policies.”

However, rigid policies can introduce challenges, particularly in regions with high currency volatility. John recalls a recent episode in Argentina, where currency devaluation outpaced inflation. “Our policy limited us to investing $10 million in local money market funds. While this adhered to policy, it required creative solutions to manage excess cash effectively,” she explained

The role of policy evolution in treasury

 Treasury policies must evolve alongside market shifts to ensure ongoing stability and risk management. Sundaram noted that Parexel’s risk management policy has evolved to reflect changes in market conditions and organisational needs. “Over the years, our risk policy has gotten bit more flexible in terms of target fixed ratio, driven by the evolution of our hedging program and capital structure and also to provide greater flexibility while maintaining stability,” he said

For John, policy evolution is critical in addressing unforeseen challenges, sharing how BioMarin tackled unexpected tax implications from FX gains. “We worked closely with auditors, consultants, and our tax team to minimize costs while adhering to policy. This proactive approach has been key to maintaining effective operations,” she noted.

Amodio reflected on the value of a conservative yet adaptable policy. “Our treasury policy, established in 2006, has guided us through multiple crises without any balance sheet losses,” he said.

“Our investment strategy focuses primarily on capital preservation. In example we are strategically managing interest rate risk by matching fixed-rate investments to similar debt maturities. In the current environment of decreasing interest rates, with our net positive financial position, we can adjust duration of investments, extending maturities on both fixed term deposits and US government bonds.” 

A holistic view: aligning strategies with business needs

Effective interest rate and cash management strategies extend beyond tactical decisions to encompass a holistic view of organisational priorities. De Vreeze highlighted the importance of integrating cash forecasting with hedging strategies. “We use tools within our TMS to align hedging overlays with multi-currency needs, optimising both risk management and financial performance,” he explained. This alignment ensures that treasury strategies remain agile and responsive to changing market conditions.

Amodio underscores the importance of focusing on core business objectives. “As a semiconductor company, our goal is to make cash available to business needs and opportunities, being a very volatile environment and industry. Treasury is primarily about enabling the business. Then it should try to add value to the entire organisation by optimising investments and minimizing financial risks.” he stated. This disciplined approach reinforces the role of the treasury as a strategic partner in achieving broader goals.

Guardians of stability

In the times of higher-for-longer interest rates, treasury professionals face both challenges and opportunities. Emerging technologies like AI and blockchain promise to enhance transparency, efficiency, and decision-making. However, the core principles of treasury—prudent risk management, clear policies, and alignment with business goals—remain unchanged.

Ultimately, the role of treasury is to ensure certainty in a fluctuating market, enabling the business to adapt and thrive. By balancing strategic foresight with technological advancements, treasury teams can turn challenges into opportunities and ensure long-term resilience.