In 1989 the UK base rate reached 14.875% as the economy was nearing the end of the decade long Thatcher boom. Inflation stood at 7.8%, the UK balance of payments was out of control and there was a housing bubble, but cash deposits were attractive as they produced an inflation beating risk free return.


In the UK recession that followed the base rate returned to single figures by 1992 and it fell consistently until July 2003 when the rate bottomed at 3.5%. It stayed relatively low for the next few years rising to 5.75% by July 2007. During this period cash was still considered an acceptable asset class.

When the financial crisis arrived in 2008/09, central banks in the US, Eurozone and UK reacted by adding liquidity to financial markets and by slashing interest rates to near zero or below.


Some banks were no longer considered safe, and there was a flight to quality assets such as Government bonds.


Eventually problem banks were closed or bailed out and Governments realised the banking system needed to be overhauled. Regulators stepped in and for the next couple of years investors were happy with safety over return.


But the banking system survived and eventually investors started seeking yield again.


In the 10 years following the financial crisis, certain asset classes have produced strong returns driven partly by the persistent low interest rate environment.

House prices have now risen to well above their 2008 levels, fine wine, vintage cars and stock markets all benefitted from the oversupply of cheap money and alternative financing such as peer to peer lending has become increasingly popular.


Cash virtually ceased to be an asset class in its own right and instead was regarded as a pool of low-income producing liquidity awaiting investment. Not only did returns on cash suffer from oversupply but the institutions that hold cash deposits, the banks, were forced by the regulators to be selective in the types of deposits they hold.


Basel 3 reforms mean that funds held in bank deposits below 31 days have little or no worth on a banks balance sheet and only longer dated deposits, which act as a buffer in case of a stress event, hold any value. Yet holders of cash still sought both instant access to their funds and a return. 


Near cash alternatives with instant access were promoted to replace the yield missing from instant access bank accounts, but, as with all investments that carry increased yield, there came with these investments an increase in risk.


Basel 3 rules mean that some banks no longer offer any interest on instant access accounts. Those banks that offer nominal interest do so on the basis that they will also hold longer dated deposits or are able to provide other financial products such as loans or foreign exchange. Managing cash successfully became a specialised operation.


Recently however, the picture regarding cash deposits has begun to change. A year after his election, the US economy is recovering strongly due to President Trump’s expansionist policies. Personal and corporate tax cuts, combined with new infrastructure spending, is fuelling growing in the US economy, unemployment is low and wage pressures are stoking inflation. 


The FOMC started increasing interest rates in 2017 and the US Fed Funds rate is now between 1.5% and 1.75% with 2-3 more increases expected this year.

The yields on 3m Treasury Bills have been driven up by increased supply and are now producing over 1.9% with the yield on the 10- year US Government bond above 3.00%.


It is the first time since 2008 that 3m T-Bills offer a higher yield than the S and P index.


Cash has become an asset class again.

The G9 uses the resources of a specialist independent offshore Treasury Team which manages the cash and immediate liquidity needs of its portfolio.


Contact us for details.


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