Cash Portfolios in a Low Interest Rate Environment
The past three years have been unusual from the perspective of Australian investors investing in the domestic money markets. During the period, cash portfolios were generally able to outperform their benchmark, whilst still being managed with very conservative constraints.
The resumption of monetary easing by the Reserve Bank of Australia (RBA) signals the start of a new phase, characterised by even lower interest rates and, at least for now, a flatter yield curve.
In this paper, we examine what a period of structurally low interest rates means for money market investors. We outline the primary sources of cash portfolio returns versus the bank bill benchmark, and investigate how much these factors have contributed over the past three years. Importantly, the discussion evolves as to how things are likely to change in the future.
The resumption of monetary easing by the RBA signals the start of a new phase, characterised by even lower interest rates and, at least for now, a flatter yield curve.
Kashi Trathen, Associate Director, Debt Investments
Looking ahead, we believe some sources of portfolio returns versus benchmark will be lower in the environment we are about to enter, compared with the period from 2016–19. However, our experience also tells us that when one source of return evaporates, other opportunities arise to take its place. Already, we are observing the potential for instruments such as repurchase agreements (‘repo’) and hedged foreign treasury bills to enhance cash returns in the future.
About the author
Associate Director (Australia)
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).