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
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.


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.