Friday 15 August 2014 by Elizabeth Moran Opinion

Tips to put a rocket under returns

Current strategies on how investors can maximise their defensive returns through fixed income.

Key points:

  1. A period of stable, low interest rates will be great for borrowers but not for investors.
  2. Strategies include: keeping term deposits short dated, moving funds between at call accounts to utilise honeymoon rates and investing in bonds for higher returns.

Interest rates look set to remain at low levels for longer.

This month, the Reserve Bank kept the cash rate on hold at 2.50 per cent for the seventh consecutive quarter and Glenn Stevens, the Governor commented “On present indications, the most prudent course is likely to be a period of stability in interest rates”.

Income from deposits continues to grind lower than the modest rates achieved last year, as higher paying fixed rate investments mature. Coupled with recent cuts to bonus saver and online accounts, investors with high allocations to deposits are forecast to have another year of low returns.

Low interest rates imply low growth and low returns across asset classes compared to historic returns. While recent returns in shares and property have been attractive, it is important to remember that higher risk assets are also more volatile, so a change in market sentiment can mean gains are eroded quickly.

Theoretically, investing in higher risk assets like shares and property should improve returns but investors have no way of knowing what those returns will be until they decide to sell the assets.

Bonds, like deposits, provide certainty that investors’ need, where projected returns are known from the date of investment, assuming investors hold the bonds to maturity.

Low risk, corporate bonds for retail investors, offer yields to maturity of up to 6 per cent per annum and remain a good alternative for those looking to increase their term deposit returns. Bonds are tradeable investments so investors do not have to hold until maturity and can sell if they need to access funds.

Current strategies that investors are using to maximise defensive returns include:

  1. Keeping term deposits short dated. While longer dated term deposits are offering higher returns, the increases are marginal and not considered worthwhile in exchange for locking away funds for three to five years.
  2. Opening new at call accounts with honeymoon rates and moving funds to maximise returns.
  3. Investing in bonds for higher returns for minimal increases in risk over deposits.
  4. Investing in higher risk bonds to boost overall portfolio returns. Bonds have a range of risk and return attributes and there are higher yield bonds available that pay a yield to maturity of up to 9 per cent per annum.
  5. If you think interest rates have hit the low point in the interest rate cycle, then start adding floating rate bonds. Income on these bonds will move up and down as they are linked to a benchmark. Bendigo and Adelaide Bank brought a subordinated floating rate bond to the market this year that is available to retail investors which has a projected yield to maturity of 6 per cent. If the market expects interest rates to rise, the income on these bonds will also rise. Investors can reduce administration of rolling over short term deposits and shopping for the best rates by investing in floating rate bonds.
  6. There are still fixed rate bonds paying very attractive high yields. Buying these bonds adds certainty to portfolios as income is fixed for the life of the bond.
  7. Add inflation linked bonds. The margins these bonds pay over inflation is approaching term deposit rates. Should inflation spike, income will follow, protecting capital value.


The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.