Short-term money markets experienced extreme COVID-19 related illiquidity in March, prompting a swift package of policy measures from the Reserve Bank of Australia. Whilst this policy action was effective in restoring confidence, it has also altered the way in which short-term interest rate markets are functioning.

A shift in the supply and demand for various money market securities has occurred and this is creating new relationships between markets, such as the Bank Bill Swap Rate/Overnight Indexed Swap (BBSW/OIS) spread turning negative for the first time in history, the overnight cash rate persistently trading below the official cash rate and a significant contraction in both supply and demand within the Floating Rate Note (FRN) market.



Source: Bloomberg, ASX, May 2020

With interest rates set to remain very low (or even negative), these new relationships are likely to persist for some time and they may have implications for how trustees manage their cash portfolios in future. In particular, we believe trustees should diversify their holdings to include securities such as Treasury Notes, and consider investing in offshore cash markets. Global cash can offer a broader liquidity pool and may allow investors to take advantage of periodic episodes of extreme relative value opportunities due to moves in the cross currency basis.