Inflation figures are due out today and many believe a low number will prompt the RBA board to cut interest rates next month
New inflation figures are due out today with the consensus being a reading of 0.4% for the quarter. This is low and anything lower is likely to force the RBA to cut the cash rate next Tuesday. Just how low the RBA board may go is the topic of much speculation. Some expect a 1% cash rate. See a sample of comments below.
Paul Dales from Capital Economics, who pretty much was the only economist to accurately predict the official cash rate would fall below 2 per cent (that was his base forecast for more than a year), now thinks it will fall to as low as 1 per cent… "Our conclusion is that underlying inflation will remain below the RBA's 2 per cent to 3 per cent target range for longer than we previously thought, which may prompt the RBA to cut interest rates to 1 per cent next year," said Dales. – Philip Baker, AFR June 2016
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The official cash rate is likely to fall to 1 per cent or lower as a lack of fiscal policy from the government places the onus on lifting demand on a weaker currency and the RBA, Macquarie says.
In a bearish note, the investment bank's head of economic research James McIntyre says that without government policy support – backed by a global fiscal boost, or substantive structural reforms in key trading partners such as China – the RBA will be forced to cut rates further as it fights disinflation. – Vanessa Desloires, Sydney Morning Herald May 2016
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The Reserve Bank is likely to cut the official cash rate to just 1 per cent to head off deflationary pressures and get economic growth up to speed according to big global investment bank JP Morgan.
In a research note, the bank's fixed income team said the cash rate was likely to edge down another 25 basis points to 1.5 per cent by the end of the year and a further 50 basis points to 1 per cent by June next year. – Stephen Letts, ABC News May 2016
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If the low point of the cycle is 1%, we are in for another three cuts.
If you agree, then logically, growth will slow and growth investments, such as equities, will struggle in coming years. Further, if you deduce interest rates will be much lower for much longer, you’d want to maximise fixed rate returns for longer. Below are some current returns for term deposits and long dated fixed rate bonds.
Term deposit rates
Term deposit rates for personal investors over five years vary considerably. The best two rates through the FIIG term deposit service for five years are both available from regional banks as follows:
- 3.00% per annum, minimum $501,000
- 3.45% per annum, minimum $20,000
The best major bank rate over the same term is 2.80% per annum for a minimum $20,000.
Long dated fixed rate bonds
Below is a sample of some longer dated fixed rate bonds. I’ll discuss a few bonds from lowest to highest risk.
The lowest risk option is the Queensland Treasury Corporation, very long dated bond maturing in around 17 years in 2033, paying 2.69% per annum. This bond’s face value has risen to over $150 since it was first issued – what a great investment it’s been had you bought it a few years back.
An investment in an Apple bond, which is similarly highly rated, but has a shorter term to maturity of six years, has a slightly lower yield to maturity of 2.59% per annum. This investment would make a fine addition to a portfolio but few will find that rate of return attractive.
Moving out on the risk curve and one bond I’ve liked for quite a while is the Rabobank 2024 bond. The yield to maturity has compressed since I first suggested the bond but at 3.25% pa until 2024 it still provides a reasonable level of certainty for longer.
Two corporate bonds with the same credit rating – Asciano and Downer have bonds maturing in 2025 and 2022 respectively. The Asciano bond has a yield to maturity of 4.59% pa while Downer is 4.12%, showing a 0.47% pick up for an additional three years to maturity.
The Westpac subordinated bond remains a favourite, with a first call date in seven years and a yield to call of 4.09% pa.
FIIG originated high yield bond, Sunland has a very attractive 7.15% pa yield to maturity but of course comes with additional risks.
Bonds with more than 5 years to maturity
| Company | Maturity/call date | Capital structure | Yield to maturity | Income/running yield | Capital price | Minimum parcel | Capital value | Accrued interest | Total value |
| Apple Inc | 28/08/2022 | Senior debt | 2.59% | 3.48% | 106.222 | $10,000 | $10,622 | $153 | $10,775
|
| Asciano Finance Ltd | 19/05/2025 | Senior debt | 4.59% | 5.01% | 104.759 | $10,000
| $10,476 | $98
| $10,574
|
| Dexus Wholesale Property | 16/06/2025 | Senior debt | 3.58% | 4.37% | 108.807 | $10,000
| $10,881 | $53
| $10,934
|
| Downer Group Finance Pty Ltd | 11/03/2022 | Senior debt | 4.12% | 4.42% | 101.898 | $10,000
| $10,190 | $169
| $10,359
|
| Qantas Airways Limited | 19/05/2022 | Senior debt | 4.14% | 6.54% | 118.472 | $10,000 | $11,487 | $145 | $11,993
|
| Queensland Treasury Corporation | 14/03/2033 | Senior debt | 2.69% | 4.31% | 150.877 | $50,000
| $75,439 | $1,201
| $76,640
|
| Rabobank Netherlands AU | 11/04/2024 | Senior debt
| 3.25% | 4.77% | 115.214 | $10,000
| $11,521 | $161
| $11,682
|
| Stockland Trust | 23/11/2022 | Senior debt
| 3.49% | 4.26% | 105.695 | $10,000
| $10,570 | $80
| $10,649
|
| Sun Group Finance Pty Ltd | 08/12/2021 | Senior debt | 3.38% | 4.56% | 107.417 | $10,000
| $10,742 | $66
| $10,807
|
| Westpac Banking Corporation | 14/06/2023 | Subordinated debt | 4.09% | 4.61% | 104.175 | $200,000 | $208,351 | $1,131
| $209,482 |
Source: FIIG Securities
Rates accurate as at 25 July 2016 but subject to change
All bonds listed are fixed rate
Black = retail and wholesale investors; red = wholesale investors only
Bonds with more than 4 years to maturity
| Company | Maturity/call date | Capital structure | Yield to maturity | Income/running yield | Capital price | Minimum parcel | Capital value | Accrued interest | Total value |
| CML Group Limited | 18/03/2021 | Senior debt | 6.99% | 7.69% | 104.000 | $10,000 | $10,400 | $19 | $10,419
|
| Global Switch Property | 23/12/2020 | Senior debt | 3.64% | 5.65% | 110.555 | $10,000
| $11,056 | $58
| $11,114
|
| Hyundai Capital Services | 03/06/2021 | Senior debt | 3.00% | 3.42% | 102.256 | $10,000
| $10,226 | $52
| $10,277
|
| Impact Group Aus Pty Ltd | 12/02/2021 | Senior debt | 8.02% | 8.38% | 101.450 | $10,000
| $10,145 | $176
| $10,321
|
| Plenary Bond Finance Unit Trust | 16/06/2021 | Senior debt
| 5.63% | 7.05% | 106.400 | $10,000
| $10,640 | -$8
| $10,632
|
| Praeco Pty Ltd | 28/07/2020 | Senior debt
| 3.98% | 6.39% | 111.600 | $10,000
| $11,160 | -$2
| $11,158
|
| SCT Logistics | 24/06/2021 | Senior debt | 6.37% | 7.27% | 105.300 | $10,000
| $10,530 | $69
| $10,599
|
| Sunland Capital Pty Ltd | 25/11/2020 | Senior debt | 7.15% | 7.44% | 101.450 | $10,000 | $10,145 | $129 | $10,274 |
Source: FIIG Securities
Rates accurate as at 25 July 2016 but subject to change
All bonds listed are fixed rate
Black = retail and wholesale investors; red = wholesale investors only
This list is not exhaustive but meant to give you an idea of the returns available.
For more information about term deposit rates or the fixed rate bonds shown, please call your local dealer.
Caution: An increase in interest rates would see a fall in fixed rate bonds prices and this is a risk with these bonds. However, if you buy and hold to maturity, and the company continues to operate, you will have a positive return.