With the RBA finally moving to cut interest rates last week by 0.25% (some might sense their reluctance to admit they got it wrong 12 months earlier), what can the yield-hungry SMSF now expect to earn on their cash and liquid investments? And what impact has the cut had in the marketplace?
Let’s start with the term deposit market.
While rates have continued to drift down, the yield curve has gone inverse (negative shaping), meaning that the market expects the Reserve Bank of Australia (RBA) to cut interest rates several times over the next 12 to 18 months. In the professional bond and money markets, the curve bottoms at around the three-year mark.
These are the rates currently quoted:
At 6.40% for five years (interest paid annually), RaboDirect looks like an outstanding offer, especially when compared with the five-year Commonwealth Government bond, which is down to 3.85%, and the equivalent five-year bank bill rate (interest paid quarterly), which is around 4.35%.
At almost 2% over the wholesale rate, this is too good to miss – and remember, deposits of up to $250,000 (per investor, per financial institution) will still be guaranteed by the government from 1 February 2012.
If five years is too long for your fund to lock away cash and you want a much shorter term, give Bank of Queensland a try (insert link: www.boq.com.au ) with their six month rate of 5.9%.
If you don’t want to try out another financial institution, try this: most banks will make an effort to match their competitors – so go to your bank armed with the competitors’ rates and apply the squeeze.
So what about yields on hybrid notes?
Spreads on the hybrid securities listed on the ASX have also tightened considerably. As is often the case in this market, there can be material misalignments in pricing, particularly when securities move from ‘cum’ to ‘ex’ entitlement to the next distribution payment. Some of the leading hybrids and their trading spreads are as follows:
The CBA’s PERL V securities, which paid a distribution on 31 October, have bounced back in price and now look expensive on a relative basis. On the other hand, there is still an overhang of profit-taking in the recent ANZ CPS3 issue (read, ANZ offers good alternative to term deposits), which makes this security look pretty good value compared to the previous ANZ CPS2 issue.
For the yield hungry, I would be sitting on the ‘bid’ in CPS3.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: Global easing cycle well underway
- Rudi Filapek-Vandyck: The broker wrap: brokers’ downgrading frenzy
- Tony Negline: Three tax options for foreign super transfers
