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Oct 29

Term Deposit Premium very high again

Source: Reserve Bank of Australia

The above chart shows the premium banks are paying for their 3 year term deposits compared to 3 year Australian Government bonds from 1992 to the end of September 2011. Since hitting its aboslute high around the start of 2010 and peaking again around July 2010, term deposits are paying aound 2% more than government bonds once again (although I acknowledge the data is a few weeks old). With the Australian government still providing a guarantee on bank deposits up to values of $200,000 from February 2012 onwards (its currently $1m), term deposits are certainly looking quite attractive for the retail investor.

Unfortunately bond funds can’t quite take advantage of these good rates. This is because banks, building societies, and credit unions aren’t interested in accepting massive sums from institutional investors knowing there is a high probability that at maturity the institutional investor won’t reinvest. This is a risk to the financial institution’s balance sheet which they look to reduce and do so by limiting the level of institutional investment and paying lower rates compared to retail investors. Retail investor money is wonderfully sticky compared to a large institution.

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