Australia remains in a persistently inflationary environment, with short-term expectations still elevated. As of May 2026, Australian Treasury forecasts indicate headline inflation will peak at 5% for the 25/26 financial year. At the same time, investors are increasingly gravitating toward headline nominal yields, with 1-year term deposits screening as attractive:
Whilst the current rate may look attractive on the surface, investing in this environment requires looking beyond nominal returns and focusing on real outcomes.
*1 Year Term Deposit Rates vs. 1Y Inflation Expectation (ADSWI 1Y ZC Swap Rate: 4.926%) | 30 April 2026
Key Considerations
1. Cash investors: Liquidity + real returns matter
- Term deposits look compelling in nominal terms, but can only just match or lag inflation
- Locking capital for 12 months at ~5% offers limited flexibility and real return vs ~4.9% inflation expectations
- If holding cash in an inflationary environment – liquidity must be a priority.
- Aquasia’s asset-backed credit solutions, the Aquasia Short-Term Income Fund (ASTIF) and the Aquasia Enhanced Credit Fund (AECF) offer:
- 100% floating rate investments, where investors receive full carry of additional rate hikes in their returns
- Preservation of capital through low market risk strategies (no interest rate duration and low credit duration)
- Liquidity terms that allow redeployment as opportunities emerge: Expectations of falling asset prices as rate cycles tighten.
- ASTIF – Daily redemptions
- AECF – Monthly redemptions
2. If locking capital: Consider movement up the risk curve
- If sacrificing liquidity (e.g. 1Y TD), return needs to compensate in real terms
- Historically, high-yielding hard assets perform better in inflationary regimes
- Aquasia’s Private Credit products, the Aquasia Residual Stock Fund (ARSF) and the Aquasia Private Investment Fund (APIF) provide:
- Yield premium over cash, preserving real gains.Exposure to hard assets (e.g. real estate) that hold value in inflationary environment.
- Structural downside protection via. majority senior secured positions subordinated by mezzanine lenders and equity tranches.
Summary
- In an environment where inflation is elevated and uncertain, the distinction between nominal and real returns is critical.
- Traditional cash and term deposits may no longer provide adequate protection of purchasing power.
- Income‑focused credit, particularly floating rate, asset‑backed strategies, offers investors a more reliable pathway to generating real returns, preserving capital, and maintaining flexibility as the cycle evolves.
- If investors are comfortable locking up capital in term deposits and foregoing liquidity, it may be worth considering Aquasia’s private credit funds, which take on incremental risk but offer the potential for real returns and stronger capital preservation in a high‑inflation environment.
Disclaimer:
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Past performance is not a reliable indicator of future performance and no guarantee is provided regarding target returns or investment outcomes.
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