Impact of surprise rate cut on fund yields

By Nedgroup Investments

The South African Reserve Bank’s Monetary Policy Committee today surprised the market with a 100 bps cut in the Repo rate to 4.25%.

This takes the call rate offered by the major banks down to 4%.

Even though the Nedgroup Investments Cash Solutions funds currently comprise predominantly floating rate notes, there is a lagged impact of rate cuts on fund yields, due to the instruments having up to 3 month resets. To illustrate this point, of the last 100 bps rate cut on 19 March 2020, only 44bps is so far reflected in the yield of the Nedgroup Investments Core Income fund.

Current gross nominal yields are as follows:
Nedgroup Investments Core Income Fund, AA rated (24 hour access) - 7.30%
Nedgroup Investments Money Market Fund, AA+ Rated (same day access) - 6.97%
Nedgroup Investments Corporate Money Market Fund, AA+ Rated (same day access) - 6.60%
Nedgroup Investments Prime Money Market Fund, AAA rated (same day access) - 6.68%
Call rate - 4.00%

The chart below illustrates the anticipated yield on the Nedgroup Investments Core Income fund over the next 14 weeks. The current yield premium over the call rate is over 3%, while the yield pick-up for the next few months also shows a healthy premium, not only over the prevailing call rate, but also over most fixed deposit rates.

The Nedgroup Investments Cash Solutions fund range remains conservatively positioned with liquidity levels of at historic highs. Between the fund range there is currently in excess of R20b on call.