Term deposits not paying their way?

If you’re frustrated with the current term deposit rates - you are not alone. Many disgruntled investors have seen their income eroded as term deposit rates have consistently fallen from above 8% in 2008.

The Reserve Bank of Australia (RBA) has just cut rates again to 2.00% - which brings the cash rate down to around the rate of inflation. Some economists are still predicting further rate cuts in the months ahead.

Given these tough fixed interest conditions - your term deposit yield is merely keeping you in line with inflation - as long as you don’t spend it, or, pay any tax on it, or, see rates cut even further.

Two ways that banks borrow money

Banks typically raise money in Australia via Term Deposit and via Listed Fixed Interest (also known collectively as ‘hybrids’), consider the following:

  • ANZ term deposit rates are currently as low as 2.13%pa - however ANZ has just raised $850M via its most recent ‘Capital Notes’ offer which pay a yield to maturity of 6.27%pa.
  • NAB term deposit rates are currently as low as 2.25%pa - and likewise is has just raised $1.25B via its most recent ‘Capital Notes’ offer which pay a yield to maturity of 5.98%pa.

Why the vast disparity I hear you ask?

It all comes down to ‘risk’. At one end of the spectrum Term Deposits offer the highest level of safety - and thus pay an almost certain rate of return (albeit very low). At the other end, bank shares offer the lowest level of security - and have little certainty around their rate of return.

Listed Fixed Interest falls somewhere in between - and as long as the issuer does not fall into financial trouble, its interest payments are both secure and certain. For this reason there has been very strong interest in bank issued Listed Fixed Interest.

What is the right solution for you?

Perhaps it's time to have a chat to us at Yield Financial Planning?  We can discuss what might be the most suitable investment for you? 

Or, we can put you in contact with our stock broker partner, Yield Equities. 



The content of this presentation is intended to be general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters or obtain relevant professional financial advice before making any financial decisions.  Examples are illustrative only. Each person should obtain any relevant professional financial, taxation and social security advice before making any financial decisions.