Cash conundrum 3.0: Bonds move into clearer focus
18 Apr, 2024

Marc Lindley, product specialist on the Ninety One Investment Platform team



Over the last year, the argument for USD Money Market funds over offshore bank accounts was a ‘no brainer’, given the pick-up in yield and the opportunity to both reduce the amount of tax payable and defer when that tax is due. Now, however, changes in the rate cycle may require a shift in perspective and investment strategy, argues Marc Lindley, product specialist on the Ninety One Investment Platform team.


Investors often exhibit behaviours that may do them a disservice from a return, tax efficiency and estate planning perspective. One of these behaviours is the hoarding of excess cash in offshore bank accounts – a major impediment to long-term financial planning objectives.


Holders of overnight retail bank deposits are now earning less than 1% in US dollars (USD) and even those prepared to lock their money away for 12 months, are still earning less than 3% interest according to Bankrate and Bloomberg data. As a result, conservative investors have turned to USD Money Market funds to access yields more commensurate with the Fed Funds rate. There are clear benefits of moving cash from a bank account to a USD Money Market fund and combining that with a policy wrapper to achieve tax and estate planning benefits. These benefits are: a pick-up in yield; reduced applicable tax rates; deferral of the tax liability; providing liquidity on death and greater preservation of wealth due to reduced fees and taxes associated with death.


With the consensus view that interest rates have peaked, and that the yield on offer from dollar cash is likely to reduce steadily over the next 12-24 months, should investors be looking at other options?


Figure 1 shows the returns of the major asset classes in each calendar year from 2008 onwards, with the best return in the top row of the table and the worst return at the bottom. There is one important trend that stands out. Where cash, as represented by USD Money Market funds (not cash in the bank), has been the top-performing asset class in any given year it has, without exception, been the worst-performing asset class in the year that follows.


In an environment where impending rate cuts are likely to progressively reduce the attractiveness of cash, conservative investors may need to consider bonds instead to deliver their yield objectives.


Figure 1: Asset class returns over calendar years from 2008

Source: Morningstar, 31 December 2023.


If we look at the last five rate hiking cycles in the US and compare the performance of cash relative to bonds at various points during those cycles the results are quite compelling, as Figure 2 illustrates.


Figure 2: The performance of cash relative to bonds at various points in the rate cycle

Source: iShares, reproduced by Ninety One. For illustrative purposes only. Historical analysis calculates average performance of the Bloomberg U.S. Aggregate Bond Index (bonds) and the Bloomberg U.S. Treasury Bills: 1-3 Months TR Index (cash) in the 6 months leading up to the last Fed rate hike, between the last rate hike and first cut, and the 6 months after the first cut. The dates used for the last rate hike of a cycle are: 1 February 1995, 25 March 1997, 16 May 2000, 29 June 2006, 19 December 2018. Dates used for the first-rate cut are: 6 July 1995, 29 September 1998,  3 January 2001, 18 September 2007, 1 August 2019.


The inverse relationship between bond yields and their prices means that once rates start to come down there is the potential to generate a capital gain, which can enhance the total return on offer. But as the timing of the first cut by the Fed remains uncertain, should investors be waiting for the Fed or consider positioning themselves ahead of the first movement?


While our instinct may tell us that waiting for rates to fall will deliver the best outcome, history suggests that it is the period that we are in now, the pausing cycle, that typically delivers the greatest opportunity for bonds to outperform cash.


To maximise this window of opportunity, an actively managed global fixed-income fund can leverage more potential sources of return, and this larger toolkit can help to optimise income whilst mitigating risk.


The Ninety One Global Diversified Income Fund provides a potential new home for funds that currently sit in bank accounts and also those sitting in USD Money Market funds, thereby helping clients’ conservative offshore investments to work harder for them. While typical USD Money Market funds provide a pick-up of between 2-3% p.a. over bank account rates, the Ninety One Global Diversified Income Fund aims to provide further yield enhancement of approximately an additional 1% after fees, whilst seeking to eliminate capital losses, both over rolling 12-month periods. These attractive return characteristics offer investors with a 12-month plus time horizon a compelling alternative to cash in the bank.


Where these investments are combined with policy wrappers, such as the Ninety One Global Life Portfolio, it further allows investors to simultaneously tackle the challenges involved with estate and succession planning, leading to improved outcomes for generations to come.






@Marc Lindley
+ posts
Share on Your Socials

You May Also Like…

What Trump Means for Markets

What Trump Means for Markets

Izak Odendaal - Old Mutual Wealth Investment Strategist     It is a year of many elections worldwide, and frustratingly we’ll have to wait right to the end for the most consequential, and possibly closest run of the lot. Six months from now, the United...


Subscribe To Our Newsletter

Subscribe To Our Newsletter

Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!

× Talk to us...