19 Aug Australian Term Deposit Rates Remain High In Global Terms
Whilst you are not used to seeing term deposit rates < 2% in Australia, competition for deposits sees the Australian Banks continuing to offer some of the highest deposit rates of some of the advanced economies in the Western World. For example NAB’s 1 year term deposit rate of 1.75% is higher than the 1.45% offered by RBC in Canada and the 0.70% offered by HSBC in the UK. In terms of spread to interest rate swaps used in wholesale markets, NAB’s 1 year term deposit rate is 0.95% above the interest rate swap.
Our own 10 Year Government Bonds yields have continued to slide to a record low of 0.85%, compared to the recent peak of 2.79% on 9 Nov 2018 (yes that is right). The extent to which the market is pricing a world of low interest rates is highlighted by the 1.43% yield on 30 year Australian Government Bonds (which were issued with yields based on the face value of around 3.25% from memory).
Earlier this year the Austrian Government issued a 100 year bond at an annual interest rate (yield) of 1%. Because of the continuing fall of interest rates throughout Europe the owners of these bonds could now trade them on-market and receive quite a hefty capital profit. Added to this there are currently $15 Trn worth of bonds and notes worldwide that are trading at negative yields. This means that if you invest in these notes/bonds that you are paying someone to hold your money for you
In the US their 10 year & 30 year bonds have also dropped to yields below 2%. This is why you are seeing (well one of the reasons anyway) as to Donald Trump tweeting out to the Head of the US Federal Reserve Jerome Powell that a cash rate of 2% is too high.
Market speculation is that the Reserve Bank may again reduce the cash rate to < 1% in 2019 – only time will tell, but low interest rates are likely to remain here for quite awhile. I wouldn’t even be surprised if the Government dropped their “debt is a bad thing” mantra and raised more long term monies at these ultra cheap interest rates to fund their infrastructure program. Productive debt could be very useful for the economy, not just borrowing monies to fund re-current expenditure. Obviously the debt has to be repaid somewhere down the track, but inflation over time would “eat away” potentially at the real value of the debt and we can potentially create more jobs, foster higher GDP & taxes being collected. Interest as a percentage of the total spend from the Federal Budget is currently around 4% of total outlays. We could as a nation incur slightly costs if the monies were used productively to “grow the whole pie”. Just refer to my previous blog – “Where Our Hard Earned Dollars Are Spent” for further information
Australia remains one of the few AAA rated countries in the world with demand for bonds issued by our Government is sure to be high (last time the offer closed oversubscribed by about 200%). Let’s add on top of this that we have recorded record trade surpluses this year in May & July as exports exploded through higher prices and export volumes for our 2 major exports iron ore & coal. Another good month for exports would see us record a Current Account Surplus – this has not happened since 1975 !!!. So whilst local demand may be soft it’s the mining industry that we are riding the back of & also will funnel extra $$$ into Government coffers.
Please note that these are my own general personal thoughts (Richie Parsons) and do not necessarily represent those of my licencee LWP Financial Pty Ltd T/As Blueprint Advisor Group, nor do they represent any form of personal financial advice.