Investing your money with the banks

IN mid-September, at the height of the financial panic in the US, interest rates on three-month US Treasury bills briefly went into the negative.

Investors were paying the Treasury to look after their money.

That did not happen even in the Great Depression, and is a measure of the trauma being suffered by US investors that they could effectively ask only to be shown a non-loss.

That's where they would put their money. Every other investment was not to be trusted.

In Australia, there has been nothing that extreme, but there has still been a flight to safety.

"In the last couple of weeks we've seen a lot of people -- professional investors as well as retail investors -- wanting to buy Australian government bonds," says Stiven Laszlo, managing director of fixed-interest brokerage Secure Investments FIB.

"That's the first time in a long time that I can say that."

Laszlo says the 10-year government bond gives an investor about 5.7 per cent. "It's the absolute risk-free rate in the Australian context, because the borrower is the Australian Government.

"We've been doing a lot of business in the government bonds lately, which shows you that people are running scared, and they just want to go for the absolute most secure investment there is. They're professional investors, but they panic with everyone else when the market's doing crazy things."

Tony Lewis, managing director of fixed-interest brokerage Lewis Securities, says investors buying bonds at the moment simply want to be in "nuclear bomb-proof safety".

"You can't blame them in this sort of market. Most of the activity we've seen in recent weeks has been retail investors buying one and two-year government bonds: they're basically happy to sacrifice yield for a year or two, to ride this crisis out in super-safe, government securities, at a yield of about 5.5-6 per cent.

"They're not keen to lock away money for much more than two years, but they want to be bullet-proof through this turmoil. It's almost as if they're saying, 'I don't care about the yield, I just want to be somewhere safe'.

'It's self-funded retirees, self-managed super funds, professional investors, all types of investors."

Lewis says investors want short-term insurance. "They just want to be safe until all this goes away: locking their money away for 10 years at the risk-free rate of 5.5 per cent doesn't appeal.

That might turn out to be the best thing that you could do -- but we don't know. But because everyone is so used to strong equity returns, nobody wants to do that," he says.

Fortunately for Australian investors, their risk-free rate is a lot higher than for US investors (a 10-year US Treasury bond yields about 3.8 per cent at present). Lewis says the Australian risk-free rate can be pushed even higher if the investor is prepared to accept state government risk. "Even with the shenanigans in NSW, the NSW Treasury Corporation is still rated AAA, the same as the Commonwealth Government. Western Australia, Victoria, Queensland and South Australia are also AAA-rated. We've been saying to investors that the state government bonds offer about another 0.6 per cent yield -- taking the yield above 6 per cent -- for the same rating."

Australian investors also get the benefit of an added buffer above the risk-free rate where they can be virtually certain of getting their money back. This "sleep at night" rate goes up to 7.5-8 per cent. It's not risk free, but all it asks is that an investor has faith in the Australian banking system.

Andrew Willink, managing director of financial services comparison website RateCity.com.au, says Australian banks have "rediscovered the deposit side of the balance sheet. They started to do this after the sub-prime crisis, when wholesale funding blew out in price, and they realised that they needed to get funds on to the balance sheet -- so they lifted deposit rates". Willink says the Australian banks have lifted their deposits by about one-third in 2008. "It's been a real silver lining to the cloud as far as depositors are concerned. For the first time in decades, institutions are actually proactively chasing people who have got cash -- chasing them with weird and wonderful offers, trying very hard to attract them into their balance sheet, and depositors are exercising their new-found market power."

A lot of institutions, he says, offer at-call accounts and term deposits at 7.5-8 per cent. "That's above market: the market rate is where the Reserve Bank cash rate is, at 7 per cent. Because it's a term deposit, you're going out along the yield curve a bit. The market rate for 90-day bank bills is about 7.37 per cent. But you can get 7.5-8 per cent, and the reasons you can do that is that despite the rescue packages, funding spreads in the wholesale markets continue to widen, and banks are prepared to pay a premium above the benchmark rate to get money in the door.


more here
Investing your money with the banks | The Australian

 

Very interesting how Choice believes that an investor can get 7% from the RBA compared to someone who works in the industry (Lazlo) believing an investor can only get about 5.7% Risk Free Rate of return....

Cheers,

Dan

 

Dan
where does it say that?
Cheers

 

...
CHOICE benchmark for deposit FHSAs
Banks, building societies and credit unions have already started to offer deposit-style FHSAs, similar in most ways to ‘normal’ savings accounts. We’ve set a benchmark for the minimum standards we think you should look for from deposit FHSAs. Some of the accounts that fall just short of the benchmark can still provide good returns, but this standard is a guide to accounts that tick all the boxes — for being simple, fair accounts with a comparatively high interest rate:

• Interest rate that matches or exceeds the Reserve Bank cash rate (currently 7%).
• Fair and simple interest (no tiered interest rates, for example).
• No account keeping fee.
• No switching fee.
• No fee to make deposits.
• No minimum deposit or regular savings requirement to get the full interest rate.
• Interest calculated daily and compounded monthly or quarterly on the full account balance (monthly is better).

CHOICE - First Home Saver Accounts

Cheers,

Dan

 

Dan

It doesn't say FROM the RBA
buy anyway we can get more than 7% from other banks
but they are not as safe as government bonds.

Cheers