An upgrade to the financial system's plumbing

Pendal

April 2024

THE plumbing of Australia's financial system is a bit like the plumbing in your house - of little interest until something goes wrong.

For those few who do take an interest in the RBA and our financial system's plumbing, the Assistant Governor Chris Kent gave a speech on Tuesday last week: "The Future of Monetary Policy Implementation".

By the end of this year, he explained, Australia will have a new system called "Ample Reserves".

In short, the central bank will set a price for "Open Market Operations" (repos) and offer unlimited quantity - instead of setting the quantity and letting the market determine the price, as was the previous system.

Banks have been flush (so to speak) with liquidity since early 2020, courtesy of RBA quantitative easing and the term funding facility over the pandemic.

These are now slowly rolling off, reducing excess reserves in the system.

The RBA is worried that the pre-pandemic "corridor and low reserve" system may not work so well.

That system relied on the RBA accurately forecasting government inflows and outflows into the system (think taxes and welfare payments) and offsetting them by adding or draining the cash back into the system through repos and reverse repos.

You lend them securities and they give you cash that you then pay interest on or vice versa.

The corridor meant banks could always borrow or lend unlimited funds with the RBA at 0.25% above or below target cash, but hardly ever did.

With Ample Reserves, banks can go to the RBA and offer unlimited securities to repo in return for cash (OMOs) at a pre-set margin to the official cash rate.

The price and frequency of these operations are yet to be determined but look like at least weekly and something like the target cash rate plus five basis points (currently 4.40%).

The RBA will release more details later in the year after market consultations.

So, what does this mean for investors?

The good news for leveraged portfolios is that there is now an "ample" supply of central bank liquidity at a reasonable price.

For investors, the good news is that overnight cash should eventually drift back towards target cash levels rather than sit at the ES level.

This would mean closer to 4.35% than 4.25% at current cash targets.

The bad news for investors, however, is that bank bills are less likely to drift too far above cash again.

Also, for relative value funds, government bond baskets (where bonds trade to futures) are less likely to get too cheap again.

Overall, it is a new era for the RBA.

It is not only temporarily moving out of the asbestos-ridden 65 Martin Place while expensive and long overdue renovations are undertaken, but it now has a new way of ensuring system liquidity is always rock solid.

Author: Tim Hext, Pendal portfolio manager and head of government bond strategies

Funds operated by this manager:

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. 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

Market Commentary - March

Glenmore Asset Management

April 2024

Funds operated by this manager:

Glenmore Australian Equities Fund

New Funds on FundMonitors.com

Below are some of the funds we've recently added to our database. Follow the links to view each fund's profile, where you'll have access to their offer documents, monthly reports, historical returns, performance analytics, rankings, research, platform availability, and news & insights. 

View Profile

View Profile

Want to see more funds?

Subscribe for full access to these funds and over 800 others