Is it safer to have less % on liquidity
Executive summary
Holding a smaller share of your portfolio in ultra-liquid cash can raise expected returns but increases exposure to market volatility and potential inability to meet short-term needs; institutional surveys show 61% of organizations still place “safety” above yield for short-term investments [1]. Market-level indicators from 2024–25 show that liquidity conditions have been uneven—Treasury market depth fell to low levels in April 2025 and price impact of trades worsened, signaling episodic fragility even in safe assets [2].
1. What “less % on liquidity” actually means — trade‑offs between safety, access and yield
Reducing cash and highly liquid instruments in favor of longer-duration or higher-yielding assets improves yield but reduces immediate access and raises the chance you must sell at a bad price during stress. Corporate treasurers in the 2025 AFP Liquidity Survey report that safety is still the top short-term objective, reflecting a preference to preserve immediate access over chasing yield [1]. Asset managers and commentators argue that “step‑out” strategies—blending money market funds with ultra-short bond funds—can preserve some liquidity while lifting yield, but these introduce credit and duration risk [3].
2. Institutional behavior: most organizations prefer safety, not minimal liquidity
The AFP survey finds 61% of organizations prioritize safety as their top short-term objective, and many respondents expressed a measured, “wait‑and‑see” approach to changing cash holdings—suggesting the prevailing institutional view is not to minimize liquidity aggressively [1]. This institutional bias toward safety matters because firms plan around cash needs; running too low a liquidity buffer risks operational distress even if long-run returns look better.
3. Market plumbing can make “safe” assets less liquid than expected
Treasury markets—often treated as the ultimate liquid refuge—showed episodes of poor depth and larger price impact in 2025, particularly in April when order book depth fell to its lowest since March 2023 and price impact measures deteriorated [2]. Advisor Perspectives and Liberty Street Economics both highlight that even traditionally liquid markets have become more fragile, so lowering cash buffers assumes those markets will always absorb sales smoothly—a risky assumption [2] [4].
4. Policy and regulation shape the available liquidity tools
Regulatory changes since 2024—such as U.S. rules requiring higher weekly liquid assets for institutional prime money market funds and FCA consultations—have reshaped what products truly deliver daily liquidity, and fund structures differ in how much “instant” liquidity they can provide [3]. Central bank operations and reserve management also affect market liquidity; Fed actions like reserve management purchases or changes to standing facilities alter the cash backdrop that influences money market behavior [5] [6].
5. Macroe backdrop: yields, Fed moves and the liquidity premium
Money market and cash-equivalents offered attractive real yields in early‑2025 amid slower-than-expected Fed easing and elevated short-term rates, making liquidity less costly in foregone yield terms than in prior years [7] [8]. But policymakers’ decisions—reserve management, balance sheet drawdowns or purchases—can quickly change the premium for liquidity and the performance of cash-like assets [6] [5].
6. Practical guidance: when cutting liquidity can be “safer” and when it’s dangerous
Cutting liquidity can be reasonable when you have predictable cash flows, access to committed credit lines, diversified funding sources, and a disciplined ladder or step‑out strategy. But it’s dangerous if your cash needs are uncertain, your funding lines can be pulled in stress, or you’d need to sell into thin Treasury or corporate bond markets—conditions flagged by research showing episodic Treasury market fragility [2] [4].
7. Conflicting perspectives and the hidden agendas in sources
Industry pieces promoting step‑out or “liquidity plus” strategies (asset managers, banks) have an implicit agenda: to attract assets into fee-bearing products by downplaying liquidity trade-offs [3] [7]. Surveys and Fed commentary emphasize safety and system resilience—reflecting both client caution and regulators’ interest in stability [1] [6]. Independent analytics warn that liquidity is dynamic and can fail precisely when needed [4] [2].
8. Bottom line — balance and contingency, not a one‑size answer
Available reporting shows a clear trade-off: less percent in liquidity improves prospective returns but raises operational and market‑stress risk; 61% of organizations still choose safety for short-term investments [1], and empirical indicators show liquidity can evaporate, even in Treasuries [2]. If you reduce liquidity, do so with explicit contingencies—stress tests, committed lines, staged maturity ladders, and awareness that market liquidity is not guaranteed [4].
Limitations: available sources do not provide individual retail guidance or a formulaic “safe” percentage for liquidity; they report institution-level preferences, market indicators and product structures [1] [2] [3].