• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

‘Chasing yield’ not the best strategy as negative rates loom

0
  • by Gavin Hinks
  • in Blogs · Treasury
  • — 21 Jan, 2021

Bank of England. Photo: Robert Bye, Unsplash

Recent speculation that the UK may be heading toward negative interest rates prompts questions at LATIF for treasury officers managing local authority funds.

Speculation is rife that the UK may be about to see negative interest rates. This week, local treasury officers are warned to maintain their focus on “security, diversity and liquidity” and avoid the “chase for yield” amid dwindling prospects for a return on investments.

With the official Bank of England rate at 0.1% and concerns that it may see further cuts, treasury officers are under pressure to ensure local authority money is working as hard as it can. But discussion this week at  Room151’s Local Authority Treasurers Investment Forum (LATIF) suggests that a return may not be the most important consideration.

According to Dennis Gepp, managing director and chief investment officer at Federated Investors, treasurers may want to put aside their concern for returns. Speaking on the subject of money market funds, he told the conference that he does not expect rates to rise for the “foreseeable future” and added that he had “given up” on a rate rise in 2021. With hopes of a return on short-term cash dashed, he says there are other issues to weigh.

“If investors will not receive meaningful returns from short-term cash, they need to ensure that they are still getting security, diversity and liquidity.”


A Practical Guide to Investing

February 16th – March 23rd, 2021
Six free weekly CPD-certified tutorials – view brochure
Register here with a .gov.uk email address


Boost

Pessimism about the prospect of returns on cash deposits has increased as speculation has intensified that the Bank of England may be heading toward negatives interest rates.

Just days ago Silvano Tenreyro, a member of the Bank’s monetary policy committee, gave a speech  in which she said negative rates could boost the UK economy prompting a slew of follow-up article from economic commentators.

“My overall assessment is that, while we can never have complete certainty, negative interest rates should with high likelihood boost UK growth and inflation,” Tenreyo said.

She added the current low rates have “helped loosen lending conditions” and said: “I believe further cuts would continue to provide stimulus.”

The subject has been well rehearsed elsewhere as the Bank considers the pros and cons of going negative. Victoria Worsfold, 151 officer at Guildford council, says one of the key topics of discussion for the Bank of England’s money market committee, on which she serves,  “is what the potential impacts of negative rates may be.”

Chasing yield

Undoutedly, low rates pose councils with hard choices when it comes to placing short-term cash. Gepp warns against pursuing yield without considering the risks which, given the current economic landscape, may exceed the potential return.

“I appreciate it is very tempting to look for yield, especially when interest rates are near zero. However, the risks of chasing yield are higher than they would normally be,” said Gepp. “The problem is that when interest rates come so low the margins between the greater risk and the lower risk get minimised.

“So, you do not get the additional return for the additional risk that you’re taking The risk of losing cash is greater than losing one or two basis point on the return of your cash.”

And looming over the whole discussion for treasurers is what happens to local government cash if rate go negative.

Some have already thought the problem through and are less concerned. According to Tim Seagrave, group finance lead at Manchester City Council, his authority has developed a “strong understanding of its own approach”.


Room151’s Monthly Online Treasury Briefing

February 26th, 2021
Sustainable investing for treasurers
Register here with a .gov.uk email address


“We’re not in there to chase yield,” says Seagrave. “We know we’re using it to manage short-term cash flow. For us it is a relatively easy choice; the challenge of negative rates is difficult but relatively minor compare to the other treasury risks that we face.”

However, he worries that some local authorities are vulnerable because they rely on investment yield to “balance their books”.

There are also concerns that money market funds might start producing negative returns. Many, including Victoria Worsfold, may be wondering how the returns might be kept positive or how long returns would be close to zero.

Gepp says the answer lies in MMF’s not being entirely invested in overnight transactions—instantly vulnerable to any interest rate moving—but spread against assets which produce a weighted average life of around 50 days. Only between 20 and 40% of portfolios are maintained in instant or weekly liquidity to be available for investors.

In common with other money market funds, Gepp also says in the event of return entering negative territory because of a fall in gross yield plus the cost fees, Federated has put in place fee “waivers” to ensure investors receive at least one basis point return.

If official rates go negative, he added, there is a process in place to ensure the money market fund “can continue to remain available to all our clients, even at negative yield.”

The prospect of negative rates is unlikely to diminish any time soon. While it remains, councils will continue to explore ways of protecting their cash.

FREE monthly newsletters
Subscribe to Room151 Newsletters

Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address

Room151 Webinars
Visit the Room151 channel

Share

You may also like...

  • LGPS: Liabilities, regulatory pressure and de-risking LGPS: Liabilities, regulatory pressure and de-risking 18 Jul, 2016
  • Central bank communications may be less obvious than they seem Central bank communications may be less obvious than they seem 29 Jul, 2013
  • Write Your Blog in Room151 Write Your Blog in Room151 28 Oct, 2011
  • Q&A: Columbia Threadneedle on its UK social bond fund Q&A: Columbia Threadneedle on its UK social bond fund 12 May, 2016

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 12 hours ago

    What role will climate change have on the pricing of government bonds?: Sponsored article: Kerry Duffain finds that “vulnerability and resilience to climate change” have a significant impact on the cost of government borrowing. Ardea Investment… dlvr.it/RtNKv7 pic.twitter.com/wDjT31x4Yt

    Room151 1 day ago

    ESGenius: Slashing emissions will fuel green growth for decades: Sponsored article: Velislava Dimitrova argues that a big enough investment could mean transition to a low, or no, carbon economy can become a reality. The world needs to slash carbon[...] dlvr.it/RtKZJp pic.twitter.com/cd8S3ijERl

    Room151 1 day ago

    Prudential code: “Not perfect, but its heart is in the right place”: The new Prudential Code offers revised rules for borrowing. Nikki Bishop is sceptical it will work while Gary Fielding offers his support. Nikki Bishop I have been asked to give[...] dlvr.it/RtKZFh pic.twitter.com/OriN28lXcb

    Room151 2 days ago

    Tremendous report from @MarkSandford3 citing @room_151 no fewer than six times (despite what the @lgcplus fact checking/counting dept might tell you) #localgov commonslibrary.parliament.uk/research-brief… 1/5

    Room151 1 week ago

    Dan Bates: Capitalisation directions are not the only tool for rebuilding finances: Dan Bates argues deep seated problems are contributing to a rush for capitalisation directions. For some time now we have been reading that a number of councils are in… dlvr.it/RspKff pic.twitter.com/xRRsgVim9u

    Room151 2 weeks ago

    Is local government funding “broken”?: Andrew Hardingham looks at the underlying issues that caused more than a third of respondents in the Room151/CCLA treasury survey to say that the funding system for local govenrment is[...] dlvr.it/RsYhsg pic.twitter.com/plNp7Ayys6

    Room151 2 weeks ago

    GameStop: A lesson for LGPS in the risks of short selling: Day traders coordinating their efforts through the social media platform Reddit have not only boosted the stock of US GameStop, but also badly hurt hedge funds engaged in huge bets[...] dlvr.it/RsGdVV pic.twitter.com/NTMC3j6J2u

    Room151 2 weeks ago

    Room151 panel backs unitary councils and devolution: Bigger isn’t always better when it comes to local government, according to Sir Bob Kerslake, chair of the Peabody Trust, but “ …we need to move to unitary government and[...] dlvr.it/RsFPNv pic.twitter.com/lT4eCi0TmV

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Will new public procurement rules offer the best commercial results?
  • Next story Global macro outlook: Virus versus vaccine

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.