The Bloomberg Bank Bill index (which we consider an appropriate benchmark for most conservatively managed client portfolios) has started to rise rapidly over the last few months as interest rates have begun to rise and the market has priced in further interest rate rises. Further, as returns on the index between September 2021 and April 2022 were minimal (the index rose from 9021.62 on 31 August 2021 to 9022.18 on 30 April 2022 – a rise of 0.6bps), essentially each monthly rise in the index value now contributes that monthly amount to the rolling 12 month index returns.
For most investors who mark to market, 12 month rolling performance relative to the Bank Bill index is quite possibly already negative. However, since few investors mark their term deposit investments to market and only some investors mark their hold to maturity securities to market, then for most investors, performance relative to the index is still currently positive although it is starting to fall.
As a result, it is highly likely that 12 month rolling investment performance relative to the index for some investors will become negative, either late in 2022 or early in 2023, simply because their investment portfolios cannot increase their average yield by 20bps per month which is what they will need to do keep up with the index until next April (when the 12 month rolling return on the index will be above 2.00% if current interest rates are unchanged).
The graph above shows the monthly returns on the Bloomberg Bank Bill index since January 2022 and a forecast of the monthly returns from September 2022 to April 2023 based on the current interest rate curve being maintained. This is conservative and likely underestimates the possible increases given most economists are predicting interest rates to rise further.
If these forecasts are realised, the 12 month rolling interest return will continue to rise to above 2.03% as per the graph below before the pace of increase slows as positive returns on the index from May 2022 onwards begin to partially offset the ongoing circa 20bps per month rises.
The more positive aspect is with rising interest rates, absolute yields on most investor portfolios have been rising in recent months. Amicus has been working with its clients to both re-set budgets for the Financial Year July 2022 to June 2023 in light of forecast higher returns, but also to work with clients on investment strategies to ensure their investment portfolio returns remain above the Bank Bill index on a 12 month rolling basis (an objective we feel is important to demonstrate the “wise and judicious” as well as the “conservative” component of the prudent person rule).
