Monday 25 May 2015 by Elizabeth Moran Opinion

Small changes can result in big outcomes

Published in the Australian 23 May 2015

In a low-rate market, a small improvement in the return on your cash deposits can add up to more than you think

Hand holding cash
 
T
ake, for example, a friend of mine who recently sold his business, pocketing a handsome sum.

He had $3 million to invest for four months while he sorted out his affairs, waiting to invest in another business venture. His bank quoted him 2.75 per cent for a four month term deposit. Although I couldn’t persuade him to invest in bonds at the time, I was able to get him a better deposit rate of 3.1 per cent. It doesn’t sound like much but do the calculations and it was an extra $3500 in his pocket.

A small boost in return can make a big difference over time. Institutions know this, so they use a variety of techniques to boost their returns from their cash. Surprisingly, institutions start at a disadvantage because they can’t access deposit rates as high as individual investors.

That is because the regulator, APRA, gives banks a lower weighting towards their capital ratios for institutional deposits so they aren’t worth as much to the banks. To overcome this, institutions make significant investments in bonds.

This is an easy, low-risk strategy for private investors to replicate. As bonds approach their maturity date, the certainty that they will be repaid increases. Companies will often refinance specific bonds months in advance, and funds are held on the balance sheet to repay the debt before it is due.

According to Bloomberg, there are 796 Australian dollar-denominated bonds due to mature in the next two years and they can be bought in the secondary market.

To my mind, the ones worth considering are those that have a higher rate of return than deposits over comparable periods. A good current one-year term deposit rate is 2.7 per cent and over two years 3.2 per cent. Institutional investors would have lower benchmarks.

I’ve identified 25 bonds that are worth considering. There are three standouts in the less than a year category.

South Australia’s electricity transmission network company, Electranet, has an inflation-linked bond maturing in just three months, on August 20, that has a yield to maturity of 3.715 per cent. While higher risk than a term deposit, it is an investment-grade credit and considered low risk, offering more than 1 per cent more than a 12-month term deposit.

One of the very few bonds listed on the ASX, the Commonwealth Bank has a floating rate bond with an impressive yield to maturity of 3.2 per cent. It matures in seven months, on December 24.

Dampier to Bunbury Natural Gas Pipeline rounds out the top three with a fixed-rate bond maturing in four months, on September 29, with a yield to maturity of 2.69 per cent.

Go beyond a year and take on a little more risk by moving down the capital structure and you’ll be surprised by the returns on offer.

All of these bonds are investment grade, some rated by credit rating agencies in the “A” range.

Three floating rate bonds with call dates — the date we expect the bond will be repaid although the term can be extended — of just over a year are: Genworth Financial Mortgage yield to call (YTC) 4.35 per cent; Big French insurer Axa YTC 4.23 per cent; and NAB subsidiary, National Capital Trust, YTC 3.38 per cent.

A fixed example is Dalrymple Bay Coal Terminal with a definite maturity date of June 9 next year, paying a YTM of 3.5 per cent.

Note: Prices accurate as at May 21 but subject to change.

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