Holding liquidity has been costly for many years. Now, cash offers again positive real returns and the fundamental macro and monetary policy conditions behind that will prevail, writes QCAM currency asset management in a client note.
Holding and managing liquidity has been painful and challenging for corporates and investors since the financial crisis of 2008. Nominal short-term interest rates were close and even below zero. Adjusted for inflation, the return on cash was mostly negative. Furthermore, in addition to holding down interest rates central banks were buying short-term government bills in large amounts, forcing liquidity managers to take more credit and market risk.
This has changed with the rapid rise in interest rates over the last two years. USD cash rates moved from zero to over 5%. Until early last year, inflation was running ahead of interest rates, keeping real cash rates in negative territory. Since then, both actual as well as expected inflation have fallen below interest rates pushing USD real cash rates above 2%.
“Eventually, central banks will cut interest rates but we think real cash rates will stay positive,” QCAM wrote.
“The period of deleveraging is over, investment is rising, savings are falling and structurally tighter labor markets lead to persistently stronger wage growth. This has two important implications. First, while central banks were trying to raise inflation towards the target level in the past, they will have to lean against the wind to prevent inflation from staying persistently above the target level in the future. Second, r-star itself has probably risen given tighter savings investment and supply-demand conditions. As a result, we think central banks have now a bias to keep real interest rates positive, probably in the range between 1% and 2%.