Is this the end of the short term deposit?

A quiet but important regulatory change happened last month when APRA’s new Liquidity Coverage Ratio took effect, making it far more expensive for financial institutions to offer investors deposits of less than 30 days. But the reason is more fundamental and impacts all term deposit rates, not just short-term.

FIIG Securities is licenced to provide general advice only and you should consider this suggestion in the context of your personal circumstances.

Whilst I’m not a big fan of re-blogging from the WIRE I thought the below article raises some interesting points as to why continuing to rely on cash for investment income is a high risk strategy. 

Is it the end of the short term deposit?

Elizabeth raises one reason why rates on cash deposits will be pushed lower – a regulatory change from APRA.

But the reason is more fundamental and impacts all term deposit rates, not just short-term.  Australian Government Bonds are at far higher yields than the rest of the western world.  The RBA’s recent decision to lower rates was driven by this gap – they are concerned that Australia’s higher rates will drive up the AUD reducing our competitive in export markets.  So they are lowering rates to ensure this doesn’t happen. 

That makes sense for the economy, but hurts retirees in particular.  Christopher Joye said in the Weekend AFR that the RBA “has screwed savers by giving them negative real interest rates that do not cover their cost of living” and that this has “ruined retirees”.  A bit over the top in my opinion, but that reflects the reality for retirees in particular. 

And the reality is that this is the ‘new normal’.  The EU, Japan and China will hold rates low for as long as they need to keep their currencies low and to avoid deflation setting in. 

The US Fed’s minutes yesterday reaffirm FIIG’s view that they will not raise rates any faster than they absolutely need to as they don’t want their currency to appreciate so fast and far that it damages their recovery.  Read FIIG’s Smart Income Guide 2015 for more about our view that the US Fed will be very patient and that markets would, once again, overestimate how much US rates will rise this year.

The only chance of rising term deposit rates in the next few years is if inflation jumps, which is even worse for investors. I commented on this topic a few weeks back in an article titled ‘Aussie Q4 CPI data – Have you considered inflation protection?’

Government bond rates are at all-time high prices (i.e. low yields), but corporate bond spreads are at historic fair value levels still.  This means investors can generate 4-6% p.a. from a diversified portfolio of bonds, and not have to take the extra risk involved with sharemarkets.  Using FIIG to build a true fixed income portfolio will help in the current market to improve cash flows and a more balanced income portfolio.

If this resonates with you, please get in touch to discuss options further.

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