Declines in cash returns 'healthy'

An expected rapid decline in returns on cash is a “healthier situation than we’ve had (in the market) for some time”, according to Simon Doyle, Schroders’ head of fixed income and multi-asset.

The rate of return for taking no risk (as bank guaranteed cash has become) “should be low”, Doyle emphasised, but Australian investors have enjoyed the “luxury of both structurally and cyclically high cash rates”.

This meant that if investors “didn’t want market risk, cash (or the effective ‘risk free’ rate) offered a reasonably good rate of return, certainly compared to risk asset returns of late”.

These high cash rates were creating distortions by “referencing all investors off the short-end of a heavily inverted yield curve”.

“Investors required cash plus something even if no risk premium existed to deliver it. Many investors tried, then failed, to beat this hurdle (in some cases miserably so).”

The reverse situation now exists, he said, with interest rates falling and, in contrast, risk premiums across credit and equity markets rising.