May 22

Approaching the Zero bound

I’m always fascinated by the various changes in financial market behaviour and this economic lockdown has created some new behaviours in the cash or money markets not seen before (or that I’m aware of).

The chart below shows the performance of 3 cash benchmarks:

  1. RBA Cash Rate Target … currently 25bps (Green)
  2. RBA Cash Overnight Rate … currently 13bps (White), and
  3. 1 month Bank Bill… currently 9bps (Yellow)
Source: Bloomberg

Since the RBA announced its last 25bps cash rate decrease on 20 March, the RBA’s overnight rate has been trading at a much lower rate, whereas before, it traded at exactly the same level as the Cash target … at 13bps and almost half the target rate, this is a statement that 0% cash has a very strong chance … and negative rates are not out of the question at all.

An even stronger statement comes from the current price of 1 month bank bills that are trading at a record low 9bps…that’s 0.09%! With the exception of some very short term anticipation of the RBA lowering its cash rates, the 1-month bank bill rate has always traded at a premium to the RBA Cash (as far as I’m aware considering my 5 minute long term history chart check didn’t yield anything). The fact the RBA Cash Target is a premium to bank bills is another strong statement that zero rates are strong chance … and potentially negative … and bank bills are clearly not as strong a credit as the government.

So for those who think bond yields are too low and no longer offer protection, hopefully the recent pricing on these cash instruments provides some food for thought as this current record low interest rate environment may well be lower than you think and may well get lower than you think.

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