Term deposit rates flat for the coming year

There’s an interesting disparity between term deposit markets and bond markets at the moment. BBSW/ swap rates which show banks expected forward interest rate view is negative over the next year before returning to a gently positive slope (see Figure 1). Overall the BBSW/ swap curve is fairly flat in the outlook period. Banks don’t expect interest rates to rise for some time and the curve implies they expect another interest rate cut in coming months. Last week the Australian Bureau of Statistics released the unemployment statistics. The unemployment rate rose from 5.6% (revised upward from 5.5% in May) to 5.7%. The rise in unemployment is a negative economic indicator and somewhat supports the case for a lower cash rate and lower forward interest rates.

Figure 1

The term deposit rates on offer for the coming year reflect the bank’s interest rate expectations and show there’s little additional reward for investing for longer terms (see Table 1). In fact the best major bank rate declines from 4.10% for 90 days to 3.95% for one year. Investors only receive an extra 35bps (0.35%) for a five year term. The best rate on the table is in the “other banks” category and shows 4.87% but investors need a minimum $500,000 to access this rate.

Table 1

Rabobank, through FIIG, are offering an attractive At Call account for new clients. The account pays a standard variable 3.5% rate but new SMSF individual and trust clients with up to $250,000 to invest are entitled to a 1.26% bonus, taking the interest for the four month period to 4.76%, a very good alternative option to current term deposit rates. If you have between $250,000 up to $1m, the standard variable rate is 3.15% coupled with the four month bonus rate of 1.26%, takes the rate to 4.41%, which again is better than the best rates shown above.

There are few deposit strategies to combat the poor term deposit rate outlook and we know many investors are wedded to term deposits given the $250,000 government guarantee. At this point I’d suggest keeping maturities relatively short as there’s no benefit in locking funds away for longer periods. Investing in bonds can be an option but if you’re nervous about how they work and the risks involved, think about investing a small amount in a well known, investment grade credit. Yields on some bonds have risen in recent weeks and we can now show investors yield to maturity returns of over 6% (see the article “Swap curve continues its upward trend to give investors yield” also published in this week’s WIRE).