Cash, Money Markets and Fixed-Income – Same, Same But Different

With both money markets and fixed-income markets offering highly attractive yields, a recurring question we are frequently being asked is – which one should I invest in?  

Unsurprisingly, there is no simple answer given it depends on the personal needs and requirements of your clients.  

It’s also important to state that an investment in either doesn’t need to be mutually exclusive of the other, given they can and do serve very different roles within client investment portfolios. 

Understanding the Differences 

Cash held in a term deposit or savings account is considered effectively ‘risk free’, given the government insures deposits of up to $250,000 per person per bank account. 

While money markets aren’t insured, they are highly liquid with short-dated investment products that can be easily converted into cash.  

So, if cash and money markets have reduced market and liquidity risk, and are currently offering attractive yields, why would an investor look further afield and opt for corporate fixed-income securities? 

Secured and Reliable Investment Returns  

Corporate fixed-income securities provide investors with the opportunity to gain investment exposure to high quality companies which pay regular and stable returns over longer time periods. 

These payments, known as coupons, are typically paid at a fixed rate on fixed dates, offering investors the ability to lock in attractive rates and gain greater certainty of investment returns from the outset. 

With rates of 6-8% pa on securities with a 3–4-year term, investing into corporate fixed-income provides investors with an effective way to lock in attractive rates now while removing some of the reinvestment risk associated with shorter-dated securities. 

Where Next for Interest Rates? 

Whether you take the view that interest rates have peaked or not, it’s clear that inflation is easing and economic output contracting across most economies.  

While rates could remain higher for longer, it’s looking increasingly likely that we are getting close to the zenith of this hiking cycle.  

This has implications for investors because if and when rates start to decline, the returns offered on cash and equivalents will very quickly evaporate. This could have detrimental effects on investors who rely on cash flows for retirement or other purposes.  

This is why cash should not be seen as a substitute for fixed-income, and vice versa.  

Bespoke Investment Opportunities  

The Australian Bond Exchange offers bespoke fixed-income investment opportunities which provide exposure to some of the world’s most recognised and reputable companies. 

Current offerings include fixed income securities linked to companies such as: 

• leading U.S. department store and retailer Macy’s Inc;  
• financial services provider MA Financial Group; and  
• global bank Barclays PLC.   

These high quality investment opportunities offer maturities of between 3 and 5 years and yields of between 6.5%- 8% pa.  

How the Australian Bond Exchange Can Help  

While cash is undeniably the safest place to keep your money, it’s important to recognise that it is not a long-term solution given returns can result in significant opportunity cost.  

While returns right now seem attractive, depending on where interest rates are headed next, returns could quickly disappear when funds are rolled over and reinvested. 

For more information about how corporate-fixed income could play a role in your clients’ investment portfolio, speak to an ABE adviser today.