Three reasons the Yield Chase is almost over… for now

Home » Education » Three reasons the Yield Chase is almost over… for now

Just 15 minutes after the Reserve Bank’s decision to cut interest rates by a further 0.25% today. That’s how long until I got my first e-mail from an investment manager explaining to me that since my interest income on cash would now be going down, I should hurry up and invest in their income equities fund. But I’m not buying it, and here’s why.

1. The markets had already priced it in.

The interest rates markets, including the amount banks pay on terms deposits, are influenced by a number of factors. One of those influences, and a key one, is what interest rates are expected to do in the next 6-12 months. The market had already priced in at least one interest rate cut for some time, and if you have rolled a term deposit in the past 2 months, chances are your rate already anticipated this interest rate cut. In fact, it has taken longer than expected for the reserve bank to get there, so you may actually get a BETTER 6 or 12 month term deposit now, than you would have a month ago.

2. Interest rates look to be bottoming.

Just a month ago, at least two interest rate cuts were expected. Now, the market is not so sure. In the US, which is way more important than our reserve bank, they have long since finished reducing rates and are looking to increase them.

3. Further cuts from here mean something bad is happening in the economy.

Further substantial rate cuts from here mean that something has gone seriously wrong with the economy in the US, or here, or somewhere else. Chances are that if this has happened, stocks will correct substantially.

So buy growth stocks, or buy value stocks, but do not buy those that have low/no earnings growth just for the yield. That trade is almost over, for a while at least.

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