Fixed Interest

A quiet but important regulatory change happened last month when APRA’s new Liquidity Coverage Ratio took effect, making it far more expensive for financial institutions to offer investors deposits of less than 30 days.

Some global bond funds and Australian fixed interest funds had fairly impressive performances in 2014, causing more interest rate securities investors to wish to explore the managed funds area more.

Online savings accounts have not been immune to the long slow grind downwards that has affected both term deposits and cash accounts.

A New Year, volatile financial markets and increased geopolitical tensions will mean many of you are reassessing your portfolio allocations. Do you have enough defensive assets? Is the mix right to meet your objectives? We take a look at the best value bonds right now.

It is a well-known fact that Australians love to invest in shares and property, often to the exclusion of other asset classes. Depending on market dynamics, this can be a costly proposition and not one that delivers the best risk-weighted returns.

Picking the winning asset classes on a yearly basis is a tough gig. Last year there were some surprising winners and losers.

Myth #6. There is too long to wait until maturity

Term deposit rates in Australia have been grinding lower all of this year and with rate cuts now being priced back into the market from June 2015 to early 2016, TD rates are coming under further pressure. Indeed, in recent weeks Alliance Bernstein said, “We could easily see a couple of rate cuts” and did not rule out a cash rate of around 2.0% by the end of 2015, from the current 2.5%. While no one has a crystal ball, the market believes that an imminent rate hike is unlikely but the likelihood is that rates will go down rather than up.

It’s APRA’s job to make sure the banks continue to operate and so it stress tests their capital reserves to understand how they would perform under various scenarios. While the news is worrying, I think we can learn from the stress testing APRA routinely performs on the banks. In fact it makes very good sense to routinely ‘stress test’ your own investment portfolio.

Readers will be familiar with headlines over the last couple of years concerning banks in Europe manipulating Libor. Recently the story has taken on a far more local flavour as ANZ revealed that seven traders caught up in investigations by the ASIC into possible manipulation of the Bank Bill Swap Rate had stepped down. ANZ told the ASX after the market had closed that it was “continuing to co-operate” with an ASIC investigation into historical trading in the BBSW market.

Myth #4. Fixed Income returns are low and will be a drag on my portfolio’s performance

The most recent, major stress event was the GFC in 2008, which was very much about the banks over extending credit to people and companies who were unable to repay it, not having enough reserves and not being able to refinance short term debt maturities. The combined forces led to a major credit crisis that we’re still trying to recover from.

Term Deposits That Require 31 Days’ Notice Of Withdrawal

We’ve come to recognise some key concerns that investors quote when discussing a potential investment, most of which are based on false assumptions.  So, if you’re still unsure about bonds, this series of articles which delves into the “Seven Key Myths” may help resolve your reservations. 

Last month I reviewed the top 10 tips for assessing a bond. This article goes one step further and provides some tips on assessing the company that issues the bond.

Australian interest rate investors tend to keep an eye on future moves in the cash rate cycle and what the Reserve Bank of Australia is likely to do next. This can help investors decide whether or not they are going to lock their money away in a term deposit for 30 days or five years or somewhere in between. If investors think that rates will rise in the near term, they will not want to lock their money away in long term TDs and are more likely to opt for short term TDs and other highly liquid instruments.

There have been many examples in the press of young millionaires that took big gambles on single projects or sports stars that sustained career ending injuries, and all of a sudden the funds disappear and they’re left in a bind. Setting aside enough funds into low risk defensive assets to live well for the rest of their lives should be fundamental in their financial strategy.

That dreaded word, volatility, has crept back into market commentary and investors are once again starting to think about how best to protect their portfolios should we see another sharp correction.