Solving the short-term investment dilemma.

Cash on hand and lower interest rates. It's a corporate treasurer's dream. But as the adage goes: Watch what you wish for because you just might get it.

Maximizing short-term returns with interest rates at record lows can be a real dilemma for corporate treasurers. The questions persist: How can excess cash can be put to productive use? Can meaningful positive returns be generated while maintaining a liquid position so that cash can be converted into longer-term investments when business conditions improve? Corporate treasurers are finding answers by thinking creatively and partnering with their financial institutions to learn more about non-traditional investment vehicles.

Despite some interest rates trending upward recently, inflationary pressures have remained modest, and the Federal Reserve is expected to keep rates low. Forecasters for the National Association for Business Economics (NABE) recently predicted the Fed would not raise rates until the summer of 2004, at the earliest.

Furthermore, while longer-term rates may be more attractive farther out on the yield curve, today's sluggish and uncertain economy dictates a more liquid position to cover unforeseen expenses, if and when they arise. Thus, many corporate treasurers are reluctant to tie up their cash for a long period of time.

Adding to the challenge, due to the slow economy, many corporations have abundant cash on hand, just waiting to be put to work. In better economic times, this cash could be invested in a number of productive business uses, such as expanding inventory or upgrading equipment. In many of today's corporations, however, business conditions do not warrant such investments.

The good news is that several short-term cash management alternatives exist that provide a solid combination of returns, liquidity and other economic benefits. While somewhat basic approaches, they can fit into an overall strategy. These include money market savings accounts and overnight sweep accounts, and treasurers can select whichever of these vehicles fits best with their company's investment policy guidelines.

Money market savings accounts can offer higher yields than other short-term investments. In addition, money market accounts provide full liquidity and the security of being insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).

Sweep accounts, including the automated repurchase investment account and the euro investment sweep, are attractive investment alternatives for a growing number of businesses that want to maximize earnings on excess available balances without taking on substantial risk. Automated sweeps are optimal for smaller companies because they are less costly than other investments, do not require the services of an investment manager and eliminate the need for daily monitoring.

Here's how automated repurchase investment accounts work: At the end of each day, after all debit and credit transactions have posted, funds are automatically moved from a commercial checking account into the sweep account, which is collateralized and invested in U.S. government-backed securities, so they are just as safe as FDIC-insured accounts. Each morning, the principal and interest from the sweep account flow back into the checking account. In this way, idle balances earn competitive market returns overnight, with no loss of liquidity, no wire transfer fees and no brokerage fees.

The euro investment sweep operates similarly, except it moves all end-of-day cash into an offshore euro time deposit account. Although this account is not collateralized and not backed by the U.S. government, it offers the same benefits as the repurchase investment sweep for those willing to take on more risk. It also delivers a higher yield than other short-term investment sweep products.

Automated repurchase investment sweeps and euro investment sweeps typically require minimum deposits, and interest rates can be tiered based on the size of the account. They provide full liquidity with complete access to funds during business hours.

While the money market savings account is well-suited for organizations that want the security of a bank deposit with FDIC insurance, those organizations whose bylaws stipulate that investments must be collateralized can take advantage of the benefits of the automated repurchase investment sweep. Those with fewer restrictions on their investments can achieve a higher yield with the euro investment sweep.

With these alternative solutions, corporate treasurers can maximize short-term returns in a low interest rate environment, and maintain liquidity--an ideal combination.

Bruce G. Keenen is Senior Vice President at KeyBank Global Treasury Management, based in Cleveland. He can be reached at 866.539.4867.