Tuesday 26 July 2016 by Elizabeth Moran Trade opportunities

Inflation due, a rate cut on the horizon, fixed rate bonds the answer

Inflation figures are due out today and many believe a low number will prompt the RBA board to cut interest rates next month

New inflation figures are due out today with the consensus being a reading of 0.4% for the quarter. This is low and anything lower is likely to force the RBA to cut the cash rate next Tuesday. Just how low the RBA board may go is the topic of much speculation. Some expect a 1% cash rate. See a sample of comments below.

Paul Dales from Capital Economics, who pretty much was the only economist to accurately predict the official cash rate would fall below 2 per cent (that was his base forecast for more than a year), now thinks it will fall to as low as 1 per cent"Our conclusion is that underlying inflation will remain below the RBA's 2 per cent to 3 per cent target range for longer than we previously thought, which may prompt the RBA to cut interest rates to 1 per cent next year," said Dales. – Philip Baker, AFR June 2016

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The official cash rate is likely to fall to 1 per cent or lower as a lack of fiscal policy from the government places the onus on lifting demand on a weaker currency and the RBA, Macquarie says.

In a bearish note, the investment bank's head of economic research James McIntyre says that without government policy support – backed by a global fiscal boost, or substantive structural reforms in key trading partners such as China – the RBA will be forced to cut rates further as it fights disinflatio​n. – Vanessa Desloires, Sydney Morning Herald May 2016

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The Reserve Bank is likely to cut the official cash rate to just 1 per cent to head off deflationary pressures and get economic growth up to speed according to big global investment bank JP Morgan.

In a research note, the bank's fixed income team said the cash rate was likely to edge down another 25 basis points to 1.5 per cent by the end of the year and a further 50 basis points to 1 per cent by June next year. – Stephen Letts, ABC News May 2016

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If the low point of the cycle is 1%, we are in for another three cuts.

If you agree, then logically, growth will slow and growth investments, such as equities, will struggle in coming years. Further, if you deduce interest rates will be much lower for much longer, you’d want to maximise fixed rate returns for longer. Below are some current returns for term deposits and long dated fixed rate bonds.

Term deposit rates

Term deposit rates for personal investors over five years vary considerably. The best two rates through the FIIG term deposit service for five years are both available from regional banks as follows:

  • 3.00% per annum, minimum $501,000
  • 3.45% per annum, minimum $20,000

The best major bank rate over the same term is 2.80% per annum for a minimum $20,000.

Long dated fixed rate bonds

Below is a sample of some longer dated fixed rate bonds. I’ll discuss a few bonds from lowest to highest risk.

The lowest risk option is the Queensland Treasury Corporation, very long dated bond maturing in around 17 years in 2033, paying 2.69% per annum. This bond’s face value has risen to over $150 since it was first issued – what a great investment it’s been had you bought it a few years back.

An investment in an Apple bond, which is similarly highly rated, but has a shorter term to maturity of six years, has a slightly lower yield to maturity of 2.59% per annum. This investment would make a fine addition to a portfolio but few will find that rate of return attractive.

Moving out on the risk curve and one bond I’ve liked for quite a while is the Rabobank 2024 bond. The yield to maturity has compressed since I first suggested the bond but at 3.25% pa until 2024 it still provides a reasonable level of certainty for longer.

Two corporate bonds with the same credit rating – Asciano and Downer have bonds maturing in 2025 and 2022 respectively. The Asciano bond has a yield to maturity of 4.59% pa while Downer is 4.12%, showing a 0.47% pick up for an additional three years to maturity.

The Westpac subordinated bond remains a favourite, with a first call date in seven years and a yield to call of 4.09% pa.

FIIG originated high yield bond, Sunland has a very attractive 7.15% pa yield to maturity but of course comes with additional risks.

Bonds with more than 5 years to maturity

Company Maturity/call date Capital structure Yield to maturity Income/running yield Capital price Minimum parcel Capital value  Accrued interest Total value
Apple Inc 28/08/2022 Senior debt 2.59% 3.48% 106.222 $10,000 $10,622 $153  $10,775
Asciano Finance Ltd 19/05/2025 Senior debt  4.59%  5.01% 104.759 $10,000
$10,476 $98
$10,574
Dexus Wholesale Property 16/06/2025 Senior debt  3.58% 4.37% 108.807 $10,000
$10,881 $53
$10,934
Downer Group Finance Pty Ltd 11/03/2022 Senior debt  4.12% 4.42% 101.898 $10,000
$10,190 $169
$10,359
Qantas Airways Limited 19/05/2022 Senior debt 4.14% 6.54% 118.472 $10,000 $11,487 $145  $11,993
Queensland Treasury Corporation 14/03/2033 Senior debt 2.69% 4.31% 150.877 $50,000
$75,439 $1,201
$76,640
Rabobank Netherlands AU 11/04/2024 Senior debt
3.25% 4.77% 115.214 $10,000
$11,521 $161
$11,682
Stockland Trust 23/11/2022 Senior debt
3.49% 4.26% 105.695 $10,000
$10,570 $80
$10,649
Sun Group Finance Pty Ltd 08/12/2021 Senior debt 3.38% 4.56% 107.417 $10,000
$10,742 $66
$10,807
Westpac Banking Corporation 14/06/2023 Subordinated debt 4.09% 4.61% 104.175 $200,000 $208,351 $1,131
$209,482

Source: FIIG Securities
Rates accurate as at 25 July 2016 but subject to change
All bonds listed are fixed rate
Black = retail and wholesale investors; red = wholesale investors only

Bonds with more than 4 years to maturity

Company Maturity/call date Capital structure Yield to maturity Income/running yield Capital price Minimum parcel Capital value  Accrued interest Total value
CML Group Limited 18/03/2021 Senior debt 6.99% 7.69% 104.000 $10,000 $10,400 $19 $10,419
Global Switch Property 23/12/2020 Senior debt  3.64% 5.65% 110.555 $10,000
$11,056 $58
$11,114
Hyundai Capital Services 03/06/2021 Senior debt  3.00% 3.42% 102.256 $10,000
$10,226 $52
$10,277
Impact Group Aus Pty Ltd 12/02/2021 Senior debt 8.02% 8.38% 101.450 $10,000
$10,145 $176
$10,321
Plenary Bond Finance Unit Trust 16/06/2021 Senior debt
5.63% 7.05% 106.400 $10,000
$10,640 -$8
$10,632
Praeco Pty Ltd 28/07/2020 Senior debt
3.98% 6.39% 111.600 $10,000
$11,160 -$2
$11,158
SCT Logistics 24/06/2021 Senior debt 6.37% 7.27% 105.300 $10,000
$10,530 $69
$10,599
Sunland Capital Pty Ltd 25/11/2020 Senior debt 7.15% 7.44% 101.450 $10,000 $10,145 $129 $10,274

Source: FIIG Securities
Rates accurate as at 25 July 2016 but subject to change
All bonds listed are fixed rate
Black = retail and wholesale investors; red = wholesale investors only


This list is not exhaustive but meant to give you an idea of the returns available.
 

For more information about term deposit rates or the fixed rate bonds shown, please call your local dealer.

Caution: An increase in interest rates would see a fall in fixed rate bonds prices and this is a risk with these bonds. However, if you buy and hold to maturity, and the company continues to operate, you will have a positive return. 

Earn over
6% pa* with Corporate Bonds

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