‘M5’ Money Markets (1 Month LIBOR)
Exhibit-1 (above). The graph shows actual 1 Month LIBOR rates paid for deposits in each of the five currencies over the last ten years. At first glance, the chart emphasizes a generally low interest rate environment. But note the interest rate differentials between US Dollar deposits and other currencies since late 2016, particularly to Euro and Swiss Francs. The differentials serve as gauge for the cost of hedging the US Dollar, and Sterling, a genuine dilemma for investors with a Swiss Franc base.
Exhibit-2 (below). Illustrated are annualised rates of return from perpetually renewing money market investments at the prevailing one month LIBOR rates (equal-weight basket of all five currencies in the sample). Unsurprisingly, the return on such cash equivalents has been singularly unattractive across any time frame shown above, suffering massive opportunity costs compared to both equities, and bonds, as represented by the multi-asset LPP-C40 Benchmark. Put differently, any investor contemplating the risk in either equities or bonds would have needed (and still does) the courage of his/her convictions to adopt a defensive investment posture. On the other hand, it is precisely the over-abundance of liquidity that keeps propelling prices of other assets higher.
Exhibit-3 (above). The table shows values of the return indices at specific dates in the upper portion, and resulting rates of return since those dates in the lower part. The highest and lowest returning markets are highlighted in green and red respectively. Across all shown time frames, liquidity in Swiss Francs has generated the poorest returns (the Swiss National Bank having been the first to push rates into negative territory), and US Dollar deposits the highest.
Exhibit-4 (below). Emphasizing the comparatively short-term horizon of the latest 12 months, this graph is a stark reminder of how different the forces affecting money market rates in each country are. If it were not for the still relatively high deposit rates in the US market, the equal-weight composite of the five countries would be very close to zero, or even below that.
Exhibit-5 (above). The graph graphically illustrates the information from exhibit-3. It shows how money market returns on US Dollars began to accelerate sharply late 2016, essentially in the aftermath of the presidential election, while in Japan, the Euro-Area, and in Switzerland deposit rates either declined, or remained at very low levels. Only money market rates in British Pounds show a different pattern.
Exhibit-6 (below). The plot of relative performance of the five money markets to the equal-weight composite over the most recent three years shows a neat bundle of distinct levels with a clear hierarchy: US money market returns have an unchallenged place at the top. with returns from Swiss Franc money markets an equally clear place in the nether regions.
Exhibit-7 (above). Annualized rates of return across trailing 36 months for the last ten years remind us graphically that money market rates are not always as presently. But it is equally evident from the graph that this environment has been with us for close to ten years, at least outside the United States.
Exhibit-8 (below). Taking a fairly long term view, the graph shows annualised returns from money markets from 31.12.1999 to date. The differences between these markets look more pronounced than they are, in the sense that they all reflect low rates of return. Still, there are two groups: Swiss Franc and Yen deposits in one, and Sterling, US Dollar, and Euro in another.
