Investing in a near-zero interest rate environment

The official cash rate has remained at an unprecedented low of 0.1% in response to severe economic weakness caused by the COVID-19 pandemic.

Expected returns on long-term bonds have also continued to fall with the 10-year government bond yield, which is the rate of return expected from investing in Australian government bonds, falling to 1% per annum in 2020.

Short-term cash rates and long-term bond yields tend to move in the same direction in response to changes to the economic outlook. The current rates, which are reflected in term deposit and mortgage rates, indicate a weak outlook for the Australian economy.

By decreasing the cash rate, the Reserve Bank of Australia aims to stimulate the economy by encouraging spending and investing via low returns on savings and reduced borrowing costs respectively.

What does this mean for investments in bonds, cash and term deposits?
Given the reduction in the official cash rate and fall in bond yields, there is a risk that future returns from these investments will be low and may even be negative.

In the past, falling interest rates have enabled the bonds to perform well with a return of 4.6% per annum over the past five years[i]. However, with interest rates currently at all-time lows, it’s unlikely that they would fall further. Hence, the returns on bonds that we’ve seen previously are not expected to repeat in the foreseeable future.

Similarly, the returns from cash and term deposits have significantly reduced. The average return for cash over the past 10 years has been 2.4% per annumⁱ, but with current rates at such low levels, it is unlikely that we will see these returns repeat in the next 10 years.

What has Australian Catholic Superannuation done about this?

In response to the downward trend in cash rates and bond yields, Australian Catholic Superannuation has reduced its exposure to bonds, cash and term deposits in favour of investments that offer better prospective returns including corporate bonds, bank debt and increasing the Fund’s exposure to equities[ii].

What can I do about it?

You are encouraged to consider your personal circumstances and ensure that your investment decisions are aligned with your tolerance for risk.

If you are a member of Australian Catholic Superannuation and need help with managing your finances, we offer advice on your superannuation investments, contributions or insurance at no additional cost through our limited advice team. Alternatively, we also offer comprehensive advice that looks at a broader range of topics including your finances outside of superannuation. Find out more about our different types of financial advice services or make an appointment today.

If you’re not a member of the Fund but would like to find out more, visit catholicsuper.com.au or contact our award-winning Member Services team today.

Any advice contained on this webpage is of a general nature only, and does not take into account your personal objectives, financial situation or needs. Prior to acting on any information on this webpage, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek independent financial advice if you are unsure of what action to take. Past performance is not an indicator of future performance.

[1] Bloomberg AusBond Government Bond Index.

[1] Investment options with a higher percentage of growth assets generally expect higher returns over the long term but have higher risk and are also likely to experience larger fluctuations in returns from year to year and more frequent negative returns.