Cash in a post COVID-19 world
Summary
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.
BBSW/OIS SPREADS
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.
About the author
Associate Director (Australia)
Kashi Trathen
Joined in 2013
Kashi is a portfolio manager in the Treasury Services team, responsible for strategy and implementation within the cash and fixed income portfolios. He also regularly contributes to FX strategy and execution, with significant experience in hedging interest rate and FX exposures using derivatives. Kashi joined IFM from Barclays, where he worked in rates and FX derivative structuring. He previously worked in fixed income trading at Deutsche Bank, dealing cross currency swaps, interest rate swaps and fixed income.
Bachelor of Economics (Monash University), Bachelor of Music Performance (University of Melbourne).
About the author
Senior Investment Writer
Jo Niall
Joined in 2019
Jo is a Senior Investment Writer in the Global External Relations Team who works closely with IFM’s fund managers to produce thought leadership articles and investor communications. Jo joined IFM from Legg Mason where she was a Senior Investment Writer but she also has nearly 20 years’ experience in trading and investment management positions. Her previous roles include Director, Asset Allocation and Strategy at Merrill Lynch Investment Management, where she was involved in the asset allocation of MLIM’s balanced funds and managing currency exposure. She was also an Economist at NSW Treasury Corporation and held various trading and economics roles at Bankers Trust Australia.
Bachelor of Economic Hons. (University of Sydney), Graduate Diploma of Applied Finance and Investment (Securities Institute of Australia)