Impact of Rate Cut on fund yields

The South African Reserve Bank’s Monetary Policy Committee (MPC) today cut the Repo rate by 50bps to 3.75%.

This takes the call rate offered by the major banks down to 3.5%.

Even though the Nedgroup Investments Cash Solutions funds currently comprise predominantly floating rate notes, there is a lagged impact of rate cuts on fund yields, due to  most of the fund’s holdings having 3 month resets.

Current gross nominal yields are as follows:
Nedgroup Investments Core Income Fund, AA rated (24 hour access) - 6.30%
Nedgroup Investments Money Market Fund, AA+ Rated (same day access) - 5.92 %
Nedgroup Investments Corporate Money Market Fund, AA+ Rated (same day access) - 5.64%
Nedgroup Investments Prime Money Market Fund, AAA rated ( same day access) - 6.09%
Call rate - 3.50%

The charts below illustrate the anticipated gross yields on the Nedgroup Investments Core Income and the Nedgroup Investments Corporate Money Market funds over the next 14 weeks. The current yield premiums over the call rate exceed 2.80% and 2.13% respectively, while the yield pick-ups for the next few months also show a healthy premium, not only over the prevailing call rate, but also over most recently downwardly adjusted fixed deposit rates.

 
Not only do the funds generate a healthy yield over and above the call rate, but they also offer liquidity – same day access on money market funds and T+1 on the Core Income fund. 
The Nedgroup Investments Cash Solutions fund range remains conservatively positioned focusing on liquidity and credit quality. Across the fund range there is currently in excess of R13b on call. Taquanta, our fund managers for all Nedgroup Investments Cash Solutions funds, have however been taking advantage of improving spreads in the market.

Based on the comments by the SARB Governor following today’s MPC announcement, inflation and GDP growth projections, and the yields that the Forward Rate Agreements are trading at in the market, we believe there is scope for a further 50bps rate cut at the next MPC meeting on 23 July 2020.