Tuesday 09 August 2016 by Guest Contributor Trade opportunities

Corporate bonds soaring high as Australia's official cash rate plummets

The RBA has cut official interest rates from 1.75% to 1.50%. With inflation at 17 year lows, wage growth at record lows and contracting investment growth, it’s clear that the RBA has made the right decision for the times

birds migrating during sunset

The RBA have an explicit inflation targeting mandate and it’s difficult to see them being able to forecast inflation pushing back within the band without a rate cut. Whilst it is a close call, they will likely cut again in November – pushing rates to 1.25% in part to inject a “sugar hit” into the economy, ahead of the Christmas trading period.

The chart below shows the RBA cash rate over the last 50 years. We are now at the lowest cash levels ever in Australia’s history. 

Source: CBA Global Markets Research Economics Update

This all leaves retirees in a difficult situation. On the one hand, they need a steady income to enjoy their retired years, whilst on the other hand they need a safe place to earn that income where the risk of losing those funds is minimal.

Corporate bonds are that middle ground where you earn a higher return than term deposits and take lower volatility than equities; the coupon payments are known and are not at the discretion of company’s directors. Importantly, you also know when your funds will be repaid – unlike an equity, which is a perpetual loan and is only realised when you sell with no certainty as to what the proceeds will be.

FIIG has many bond opportunities which can give you control of your financial situation. The below model investment retail portfolio below averages 5.00% yield to maturity and provides income of 5.76% over 4.16 years.

Model investment retail portfolio

Company Maturity/call date Bond type Purchase yield Running yield Capital value Accrued interest Total value
CML Group 18/05/2020 Floating rate 6.42% 7.07% $39,026 $166 $39,192
Downer Group Finance 29/11/2018 Fixed rate 3.27% 5.45% $21,089 $225  $21,314
Praeco 28/07/2020 Fixed rate 3.78% 6.35% $44,920 $93 $45,013
Qantas 19/05/2022 Fixed rate 4.01% 6.51% $47,643 $691 $48,334
Sydney Airport 20/11/2030 Inflation linked 5.77% 3.17% $56,257 $393 $56,651
360 Capital Investment Trust  19/09/2019 Fixed rate 6.00% 6.73% $38,950 $1,019 $39,969
Source: FIIG Securities
Note: Accurate as of 5 August 2016 but subject to change
All bonds listed are senior debt and available to both wholesale and retail investors