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What this week’s rate rise means for cash investors

What’s next for rates and what does it mean for investors? Here’s a quick overview from Pendal’s Head of Cash Strategies STEVE CAMPBELL

THE Reserve Bank wrong-footed the market this week when it raised the cash rate by 0.25% to 0.35% — compared to consensus expectations of 15 basis points.

The inflation data in late April was too much to stomach.

You might as well lock in a 40-basis-point increase for June now to get the cash rate back to 0.75%.

The cash rate now looks as though it will be closer to 1.75% by the end of the year.

What’s next?

Ahead of updated forecasts that we’ll receive in their Statement on Monetary Policy this Friday, Tuesday’s statement revealed the following RBA forecasts:

  • Unemployment to fall to 3.5% in early 2023
  • GDP to grow 4.25% in 2022 and 2% in 2023
  • Inflation around 6% in 2022 and underlying inflation around 4.75%
  • Headline and underlying inflation moderating to about 3% by mid-2024

Forecasting has never been more difficult with conflict in Ukraine driving commodity prices, supply chains affected by China’s zero-Covid policy and a domestic unemployment rate not seen in 50 years.

The RBA’s forecasts previously have missed the mark by a fair way, so I am not giving too much weight to what they are saying with their longer-dated forecasts.

Things change quickly.

It was only two months ago that the RBA board was prepared to be patient.

They are more likely to panic in the coming months as other central banks raise rates by 50 basis points, starting with the Federal Reserve later this week.

Throw the Canadians and Kiwis in the 50 rate hike club as well.

The RBA is not quite in the same situation as the Fed, which has acknowledged it is behind the curve. (In the US the starting point for inflation was higher, the labour market tighter and wage inflation was picking up quickly.)

But they are still behind where they want to be — 0.1% was held for too long in hindsight.

Find out about

Pendal’s
cash funds

What does this mean for investors?

Six-month yields are likely to sit closer to 1.65% (from 1.48% pre meeting) so better days are ahead.

Those sitting in term deposits may enjoy having their deposits valued at par — but they are accruing at a much lower rate than other opportunities in the market.

Investor should be wary of investing in short-dated TDs for cash funds.

First and foremost, cash should be there to provide liquidity at all times while preserving capital.

TDs are great at preserving capital. But their liquidity? It’s almost quicker to sell a house than wait for TDs to mature.

I expect spreads to widen on RMBS (residential mortgage-backed securities, or mortgage bonds).

I expect we’ll see more volatility, even by cash fund standards in the coming months.

“It’s also why I think Pendal Stable Cash Plus Fund is well placed in this environment.

“Short-dated, highly liquid assets will quickly reflect the changes that the RBA will deliver in the coming months.”


About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about  Pendal’s cash funds:

Short Term Income Securities Fund

Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at May 5, 2022. PFSL is the responsible entity and issuer of units in the Pendal Short Term Income Securities Fund (Fund) ARSN: 088 863 469. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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