Balancing certainty and security

In inflationary times, doing nothing could be your riskiest move. We offer a broad range of investment and liquidity solutions.

What has been happening with interest rates?

Since July 2022, interest rates in Europe, and elsewhere like the UK and the US, have been increasing as Central Banks try to tackle rising inflation.

Bank deposits have historically provided savers and investors with access to low risk solutions to generate a return on their money. However, many banks have been slow to pass on recent interest rate increases.

With inflation running at levels above central bank targets, savings in deposit accounts face the prospect of declining real values. So, we have been actively engaging with our clients over the last eighteen months around solutions for low risk savers which offer competitive rates of return more in line with where interest rates are currently.

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What are those solutions?

One popular option is Money market funds. These funds invest in short term bonds from a wide range of institutions with strong credit ratings. They offer good diversification and liquidity. More importantly, the yields on money market funds have increased in line with short term interest rates and therefore currently offer a potentially more attractive rate of return than many deposits.

A second option is Government bonds. When Governments need to borrow they issue bonds that investors buy. These bonds offer attractive rates of return and a high degree of capital security. Bonds pay a coupon or dividend usually annually.

What are the risks?

Even a deposit with a bank comes with a risk, so these liquidity solutions also have some risks associated with them.Government bonds for example are subject to the risk of default. If the Government that issues the bond cannot repay its debts and defaults, there is the possibility of losing your capital. You can mitigate this risk by buying bonds from the best and strongest rated government. So Germany for example is a triple A rated Government. So the risk of default is very modest. Similarly with the money market funds, there is some risk that underlying bonds default. But we can mitigate this risk by spreading the fund over a large number of counterparties.

What are the other considerations we need to take in to account?

Time horizon is an important consideration in all investment and saving decisions. Our liquidity solutions suit investors with a relatively short time horizon. For some people that may not need access to their cash for a period beyond two years, there are a greater number of options to consider. So it’s important to figure out what funds you need readily access to at short notice versus funds that you may be able to take a slightly longer term view with.

Let us help you unlock the full potential of your money.

Talk to us today.