The funds have weathered the storm really well, emerging much stronger and ready for what’s to come.
This crisis has been around liquidity and now that we’ve been able to get through the liquidity crisis, what are the credit risks going forward? Cash is a great place to be for the next while. It gives you flexibility and the ability to move and adapt to any conditions that arise. If you’re sitting on cash, the choice is between holding a fixed deposit or a longer-dated NCD, especially fixed-rate ones, versus a money market or income fund.
A 1-year fixed NCD will give you 4.9% while an income fund is currently yielding on a running yield, 6.6%, which is about 170 bps pick-up for diversified bank risk. Following the recent 2% rate cut, the current fund yield of 6.6% will go down to 5.5%. If we have another rate cut of 50bps next week, we would expect an additional 50bps reduction in fund yield over the next three months, with a further 50bsp cut taking the yield down to 5%, still higher than 4.9%. Given the current uncertainty, cash is something that you can be adapted to a changing environment very quickly. Income funds give you flexibility and liquidity, which is going to be king going forwards for at least the next six months. The next thing that will be king is the credit that you hold.