Negative interest rates could pose a threat to the £47 billion money market fund sector, warns AXA Investment Managers’ Nicolas Trindade.
The sector, which allows investors to earn a small amount of interest while having ready access to their cash, saw outflows of £1.7 billion during the course of the summer amid talk from the Bank of England that they were considering introducing negative rates to help support the UK’s struggling economy.
Trindade, manager of the AXA Sterling Credit Short Duration Bond, says: “We have seen interest rates and government yields plummeting this year and that has led to ever lower money market rates. There is a real risk the UK goes further and does opt to introduce negative rates and for money market funds that would be a clear negative.”
With one-month Libor rates having fallen sharply to around 0.14%, Trindade said the case for holding short duration assets rather than money market funds has strengthened, with the yields available from short duration assets significantly higher than the near zero rate money market funds pay.
Trindade explains: “All yields have fallen but short duration bonds are still attractive, particularly for cash investors who are looking for products exhibiting lower volatility and drawdowns and can commit to holding money in these bonds for a slightly longer time period.”
He adds: “After the significant spread compression we have seen since late March, we believe 2021 will be all about income return and we have been adding to high yield and emerging market bonds to generate extra returns.
“Emerging market debt in particular will benefit from that and from continued dollar weakness and low US treasury yields which we also expect.”