Taking advantage of rising interest rates through short-dated bonds

Monthly Monitor - May 2023

Monthly Monitor - May 2023

Taking advantage of rising interest rates through short-dated bonds. 

Although central banks have increased interest rates meaningfully, depositors are yet to see the full benefits reflected in the rates domestic banks are offering.

For investors looking to mitigate the effects of higher rates of inflation, there are other, better ways to capture the increase in central bank rates than deposit accounts.

Since July 2022 the ECB has raised the rate on its deposit facility seven times, with a cumulative rise of 3.75 percentage points, increasing the rate from -0.5% to 3.25%.

However, banks across the eurozone, and particularly in Ireland, are awash with liquidity and so do not need to attract extra deposits to fund their lending activities. Consequently, eurozone banks have been slow to pass on the increase in ECB rates to their deposit rates.

At the time of writing, the rate on offer from both “pillar” banks in Ireland on a 12-month fixed-term account is just 0.5%¹, well below the ECB rate and the rate of consumer price inflation.

However, the yields available on short-term eurozone government bonds have tracked the changes in ECB rates much more closely. For example, yields on short-term German government bonds (one year or less in maturity) are mostly within a range of 2.5-2.9% at present. The yields on equivalent German sovereign debt when the ECB started to raise rates last July were slightly negative.

This presents an opportunity for our Gresham House Euro Liquidity Fund (GHELF) as it invests in cash deposits and short-dated bonds.

Earlier this year the GHELF was circa 72% invested in cash and deposits and circa 28% in short-term government bonds. As the deposits within the Fund have rolled over we have redeployed the maturing amounts into short-term eurozone government bonds as the yields are materially higher than the bank deposit rates on offer. The Fund’s weighting in short-dated bonds had increased to 48% at the end of April and is likely to be over 95% by the end of May.

As a result of the repositioning into short-dated bonds we estimate that the annual return of the GHELF will increase to 1-2%², well above the rates on offer from the domestic “pillar” banks for 12-month fixed-term deposits.

The increase in the GHELF’s weighting in short-dated bonds will possibly involve a small increase in its short-term volatility profile.

Overall, the Fund, and its flexibility, makes a viable alternative for those considering committing to deposits of 12 months or longer.


1. Source: Bank of Ireland and AIB websites 19 May 2023
2. Warning: These figures are estimates only. They are not a reliable guide to the further performance of this investment.

Any views and opinions are those of the Fund Managers, and coverage of any assets held must be taken in context of the constitution of the fund and in no way reflect an investment recommendation.

Capital at risk. If you invest in any Gresham House funds, you may lose some or all of the money you invest. The value of your investment may go down as well as up. This investment may be affected by changes in currency exchange rates. Past performance is not necessarily a guide to future performance.

The above disclaimer and limitations of liability are applicable to the fullest extent permitted by law, whether in Contract, Statute, Tort (including without limitation, negligence) or otherwise.

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More views from Gresham House