Is this the end of the short term deposit?
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.
Frequently Asked Questions about this Article…
Short-term deposit rates are declining due to regulatory changes from APRA and the Reserve Bank of Australia's decision to lower rates. This is aimed at preventing the Australian dollar from appreciating too much, which could harm export competitiveness.
Lower interest rates negatively impact retirees by providing them with negative real interest rates that do not cover their cost of living, making it challenging to maintain their standard of living.
The 'new normal' for interest rates globally involves maintaining low rates to keep currencies low and avoid deflation, as seen in the EU, Japan, and China. This trend is expected to continue for the foreseeable future.
The US Federal Reserve is expected to be very patient with raising interest rates, as they aim to avoid rapid currency appreciation that could hinder economic recovery. Markets often overestimate how much US rates will rise.
Term deposit rates might rise if inflation increases significantly. However, this scenario could be detrimental to investors as it would erode purchasing power.
Government bond rates are currently at all-time high prices, which means they have low yields. This situation contrasts with corporate bond spreads, which are at historic fair value levels.
Investors can achieve better returns by diversifying their portfolio with corporate bonds, which can generate 4-6% p.a. This approach avoids the extra risk associated with share markets and provides a more balanced income portfolio.
FIIG Securities can assist investors in building a true fixed income portfolio, which helps improve cash flows and create a more balanced income strategy in the current low-interest-rate environment.
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