£100bn scheme presents ‘challenge’ to councils seeking a home for cash
0A new £100bn round of quantitative easing announced last week by the Bank of England is set to cause headaches for council treasurers looking for returns on their cash, according to sector experts.
The Bank last week announced the Term Funding Scheme, which is aimed at providing funding for banks at interest rates close to the 0.25% base rate.
However, the move is likely to make it more difficult for councils to find a home for short duration cash, according to Robin Cresswell, managing principal at Payden & Rygel.
He said: “This facility makes the need for retail and wholesale depositors redundant for those banks that choose to access it.
“Already one of the big four lenders has withdrawn or reduced its current term deposit rates and overnight rates are converging towards zero.
“Whilst a number of depositors have protected themselves in the last few months – placing funds out for terms of one, two, and three years – these rates are unlikely to be repeated and, as near deposits mature and new funds accumulate, generating any return on cash is going to be a challenge.”
The Term Funding Scheme came as part of a package of measures including a cut for the Bank Rate to 0.25%, a scheme to buy £10bn of corporate bonds and an expansion of the asset purchase scheme for UK government bonds by £60bn.
Rob Ford, founding partner and portfolio manager at TwentyFour Asset Management, said that the supply of some instruments could start to become more scarce, making it harder for councils to diversify their investments.
He said: “There could be a supply shortage in investments like certificates of deposits.
“The shorter end of the market will still exist, though, up to about three months for day-to-day balance sheet management.”
Dennis Gepp, managing director and chief investment officer at Federated Investors, said: “I think that removing corporate paper will potentially affect yields.”
However, he said that the scheme would not reduce the banks’ appetite to take money from local authority treasurers.
He said: “We are talking about £100bn. The size of the banks’ total funding requirement in the UK is much more than that.”
