Interest Rates Undermine Yields

Money market funds, the largest funds in Croatia, are heavily influenced by the expansive monetary policy of central banks and historically low interest rates. They are losing their attractiveness.

The past year will be remembered by fund managers managing money market funds for the sudden spike in kuna interest rates at the end of summer due to the announcement of the conversion of loans in šwiss francs.

– Funds were given the opportunity to actively reduce duration and take advantage of the benefits of the inverted kuna short-term yield curve. Interestingly, throughout the year, yields at auctions of one-year treasury bills of the Ministry of Finance did not move from 1.5 percent, while kuna interest rates on deposits, especially with shorter maturities, carried almost double the yields. It was certainly a challenge to take advantage of the mentioned increase in short-term interest rates on deposits, which also implied lowering the duration of kuna money market funds – explains Marko Hunjak, head of the Asset Management Department at RBA Investa.

Minimal Risks 

The end of the year, with a constant surplus of kuna liquidity of around eight billion kuna, brought, says Hunjak, a significant drop in interest rates on kuna deposits and one-year treasury bills, which fell below 1.5 percent at auctions of the Ministry of Finance after more than a year of stagnation.

– This drop in interest rates and yields will be the main challenge for achieving yields this year as well. This trend could be reversed by more serious economic growth based on meaningful reforms, which we all hope for – emphasizes Matej Modrovčić, CEO of Hypo Alpe-Adria-Invest.

Additionally, euro money market funds faced significant reinvestment risks of maturing euro deposits.

– Since the domestic market is not abundant in foreign treasury bills or short-term euro bonds, euro deposits dominated the assets of domestic euro money market funds. Throughout the year, almost all domestic banks lowered interest rates on euro deposits in the interbank market – says Hunjak.

Money market funds are currently under strong influence of the expansive monetary policies of central banks and historically low interest rates that are a product of such policies.

– They are certainly no longer as attractive to the average investor as in previous years, but given their stability and the fact that interest rates on sight deposits are mostly at zero, money market funds still offer a premium for all investors who have a short-term surplus of funds in current and giro accounts. In this case, the development of awareness of how to earn additionally using money market funds with minimal risk increase is crucial – explains Boris Guljaš, CEO of HPB Investa.

Change in Preferences 

Money market funds are the largest funds in Croatia. Their assets can fluctuate significantly due to large investors, such as mandatory pension funds that invest in such funds for several months and then withdraw all the money when the state issues, for example, new bonds. Money market funds are very conservative, which is why their yields are low. For example, the highest yield of 1.48 percent last year was achieved by the money market fund Locusta Cash, followed by Auctor Cash with a yield of 1.14 percent and PBZ Dollar fund with a yield of 1.1 percent.

– If the trend of falling interest rates continues, citizens’ risk appetite will slowly change, interest in riskier structured funds will increasingly grow, and interest in mixed and equity funds will gradually return – concludes Igor Filipović, junior portfolio manager at OTP Investa.