Wednesday 07 August 2019 by Jonathan Sheridan Trade opportunities

How do I get low risk returns that are better than cash?

On the 2nd of July the RBA cut interest rates for just the second time in 3 years, to a new record low of 1%. A cut to 0.75% by November is fully priced in and markets are implying a 42% chance that rates will be cut to 0.5% by the end of the year. 

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This means that term deposit rates, already paying around only 2% in second tier banks for one year since the GFC brought rates down, will go even lower. Major banks are averaging just 1.8%.

RBA 1 Year TD Rates
Source: Reserve Bank of Australia

The big question this raises is how can I get a stable income without taking on excessive risk I might not understand?  The usual answer is in an ASX listed bank hybrid.  The name is familiar and the returns look good.

However, these are complex instruments, whose sale to non-professional investors in the UK has been banned by the regulator. The actual answer should be investment grade corporate bonds. These are simply loans to large companies instead of to a bank (by way of a deposit, noting that these are government guaranteed up to $250k).

These are low risk (albeit not as low as a bank deposit) investments, with an excellent record of returning capital at the end of the term. There have only been 3 instances in the last 30 years when investors have not been paid back in full and on time.

This chart from Vanguard shows that over that period, Australian bonds have returned approximately 2% p.a. more than bank deposits, and are a lot less volatile than shares, with only a slightly lower return. 

Vanguard

With investment grade bonds currently returning 3-4% p.a. for varying terms, this relationship looks to still hold.

Staying in bank deposits likely to pay closer to 1.5% for the foreseeable future may not necessarily deliver the required income that could be achieved in the past. We are here to help you along that journey to a sustainable income.

Earn over
6% pa* with Corporate Bonds

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