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The Point
Quick, actionable insights for investors
Income and Fixed Interest
Steve Campbell: Is it time to get into TDs? I say no, no, no
It’s a bad take on Amy Winehouse, but ‘no, no, no’ is bang-on when it comes to investing in term deposits right now, says head of cash Steve Campbell.
“The TD question is increasingly coming up as the Reserve Bank moves closer to pausing monetary policy tightening,” says Steve.
“In early 2022, after being starved for yields over an extended period, investors were awestruck with 1%+ yields on offer for 12-18-month tenors.
“At the time it looked great. I doubt those who locked in are feeling so happy now about the decision to tie liquidity up in a lower yielding asset.”
While there are a range of important differences between TDs and cash funds – including higher risk and price volatility for cash funds – Steve reckons access to liquidity will remain important this year.
“This year may not be as volatile as 2022, but I doubt calm waters lay ahead for the rest of 2023.”
Steve Campbell: RBA likely to move to quarterly tightening in 2023
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Steve Campbell: RBA likely to move to quarterly tightening in 2023
After this week’s 25-point rate hike, another 25 points is more likely than not in December, says our head of cash strategies Steve Campbell.
“Key uncertainties remain on the response of household spending to monetary policy tightening and a gloomier global economic outlook.
“Next year should see things change however, with policy tightening likely limited to one or two hikes.
“For many race-goers Tuesday was a tough day. That’s also the case for households with a variable mortgage.
“For households with fixed-rate mortgages mid-2023 and beyond is when the pain is really set to kick in with mortgage repayments about to increase sharply.
“The RBA is more than aware of this. It’s a reason not to overtighten in the first half of 2023.”
Fixed Interest: What’s next for rates and inflation
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Fixed Interest: What’s next for rates and inflation
What’s next after today’s 50bp rates hike
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What’s next after today’s 50bp rates hike
What today’s inflation data means for interest rates
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What today’s inflation data means for interest rates
What the Reserve Bank’s 0.5% rate rise means for investors
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What the Reserve Bank’s 0.5% rate rise means for investors
After this week’s higher-than-expected rate rise, will we see a cash rate close to 3% by the end of 2022?
“The cash rate has been held too low for too long and the RBA is behind the curve,” says Pendal’s head of cash strategies Steve Campbell.
“They are moving more quickly to get closer to neutral. I view 50 basis points next month as more probable than 25.”
Are markets right about a cash rate closer to 3% by year’s end? “Market pricing is aggressive, but at the moment I wouldn’t rule anything out,” Steve says.
Markets are looking for another 3% of rate hikes in the next 12 months — but is the economy ready?
“The RBA tried to imply the economy would be resilient. But the tide is now going out.
“The first 1.5% of hikes will see belt-tightening, but probably no more. However the next 1.5% could see actual stress, especially in housing.
“This is an experiment the RBA hasn’t undertaken for more than a decade — and risks of a policy error are rising.”
Michael Blayney: Three investing rules for turbulent times
Emotion can overwhelm strategy when markets are volatile. Pendal’s multi-asset chief Michael Blayney has three simple rules to remember in times like these:
- Don’t Panic: A well thought-out and documented philosophy and process is crucial to any active decision making during volatility. This helps you stay disciplined despite the noise. It’s easy to get swayed by emotion, or worse still, enter a crisis at a risk level that wasn’t right for you to begin with.
- Look for opportunities, but at least rebalance: Disciplined rebalancing adds to returns and reduces risk over time, compared to letting a portfolio run.
- Diversification Matters: Diversified investors know there’s always going to be some part of their portfolio that’s not working as well as others. Then the cycle turns and they need that part of the portfolio. That cycle can take a decade so an investor must be able to cope emotionally with an underperforming asset for a period. Always include enough liquidity (cash) for your short-term needs. You never want to be a forced seller.
What this week’s rate rise means for cash investors
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What this week’s rate rise means for cash investors
The cash rate now looks like it will be closer to 1.75% by the end of 2022 after this week’s jump to 0.35%.
“It’s better times ahead for cash investors, though the speed of the move has not been without some pain,” says our head of cash strategies Steve Campbell.
Six-month yields are now likely to sit closer to 1.65%, up from 1.48%, says Steve.
“Those sitting in term deposits may enjoy having their deposits valued at par — but they are accruing at a much lower rate than other opportunities in the market.”
Investors should be wary of short-dated TDs.
“First and foremost cash should be there to provide liquidity while preserving capital. TDs are great at preserving capital. But liquidity? It’s almost quicker to sell a house than wait for TDs to mature.
“I expect we’ll see more volatility, even by cash fund standards in the coming months.
“Short-dated, highly liquid assets will quickly reflect the changes that the RBA will deliver in the coming months. It’s why I think our Pendal Stable Cash Plus Fund is well placed in this environment.”
Could higher rates work against lower inflation? And what would that mean for bonds?
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Could higher rates work against lower inflation? And what would that mean for bonds?
Ongoing demand is blunting the impact of higher rates, argues Oliver Ge, an assistant PM with Pendal’s income and fixed interest team.
“When households are in decent shape, as they are today – when you have wages growth at decade highs, unemployment near record lows, and savings plentiful – you end up with an environment where people are much less sensitive to price changes,” he says.
“As a central banker you see inflation rising and your natural instinct is to raise rates. But the usual transmission mechanism is broken.”
Higher interest rates will eventually impact, but they’re not working just now, argues Oliver.
He believes there could be a breaking point mid-next year, leading to a reversal from the RBA.
That could make bonds even better value than they are today, he says.
Oliver Ge: Fears of a ’70s inflation re-run are overblown
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Oliver Ge: Fears of a ’70s inflation re-run are overblown
US inflation numbers were higher than expected in August, prompting more headlines about a second wave of inflation and further interest rate rises.
Can investors really expect a 1970s inflation re-run?
“There’s a lot of commentary on a possible ’70s-style, second wave of inflation,” says Oliver Ge, a portfolio manager with Pendal’s income and fixed interest team.
“But I don’t believe we’re going down that path. We’re not even close to a rerun of the 70s.”
Higher US inflation in August is just one uptick after 13 consecutive months of disinflation – and inflammatory news headlines are unwarranted, Oliver argues.
“The difference is that back then, the US was highly oil-dependent, and it also was experiencing a massive devaluation of its currency. Put the two together and it triggered a big wave of inflation.
“The US is no longer energy-dependent – in fact it is an exporter of oil. Unionisation is no longer widespread. There’s none of the original catalysts that prompted the blowout.”
Recession risk is still out there. Here’s why
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Recession risk is still out there. Here’s why
The risk of recession appears to be side-lined for now, but investors may be overlooking one factor, argues Pendal’s Oliver Ge.
Much of discussion about higher interest rates has been focused on the impact of bigger mortgage repayments for homeowners.
But tighter credit conditions and stricter collateral requirements for business are likely to have a more significant impact, says Oliver, an assistant PM with our fixed interest team.
“Higher interest payments are a strain for businesses, but it’s when you lose access to credit that the stress comes through.”
There is evidence of tighter lending standards in the US which will likely flow through to defaults in six-to-nine months, he says.
“The prospect of recession has for the moment been sidelined, but the risk is still very much there.”
Inverted yield curve: what it means (and it’s not what you think)
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Inverted yield curve: what it means (and it’s not what you think)
Longer-dated bonds usually pay higher interest rates to compensate for the increased risk over time.
But right now short-term interest rates are moving closer to — and even higher than — long-term rates.
This “yield curve inversion” is a very important signal since it usually means a recession is imminent.
But that’s not the case this time, argues Oliver Ge, an assistant portfolio manager with our Income and Fixed Interest team.
With a strong global economy, low unemployment and benign equity market conditions, analysts have been looking for an alternative explanation for the inversion.
The inversion may be explained by expectations that current inflationary pressures are only short term, says Oliver.
“Short-dated bond yields are higher because they carry a premium to their longer-dated counterparts to compensate investors for bearing higher near-term inflation risk.
“That’s what’s driving the inversion.”
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