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THESE are risky times in world equity markets -- witness the 30 per cent plunge in bank shares. What better time to consider cash and bonds, as a safe haven against the storms in the equity markets?
Returns on cash investments are usually far lower than those on equities, but this isn't always the case. Everyday bank accounts, once the poor cousins of banking, are paying 7 per cent and more from the first dollar in an account.
Suncorp's Everyday Options account will allow a customer to direct funds into a related savings account that will pay 7.15 per cent at call. Suncorp also has a term deposit that will earn 8.15 per cent for a six-month term and 8.4 per cent for 12 months.
Citibank is offering an 8 per cent return on cash investments to online customers, while Commonwealth Bank and Westpac are offering 8.1 per cent for term deposits of six to 12 months.
"It's been a long time since we've seen such rates on bank-backed deposits," says the Commonwealth's head of retail deposits, Michael Cant.
As Suncorp's manager of deposits, Terry Wasmund, says: "This is a great time for savers. Those saving for their first home or who have paid off their home have an excellent opportunity to take advantage of the high interest rates on offer."
Double-digit returns are a real possibility for investors willing to move to the longer terms involved in bonds, according to Anne Anderson, head of fixed-interest at UBS Asset Management, in the wake of global credit market movements.
"There are bond issues in the market from the big banks that will deliver 10 per cent yields with little extra risk," she says.
A bond is a loan to a government, corporation or other entity, known as the issuer. In return for your loan, the issuer promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures.
Big financial institutions will trade bonds before they reach maturity to exploit pricing and timing opportunities, to achieve much more than the nominal rate of interest.
They are rated according to the financial strength of the issuer, and generally speaking anything with an A-rating is good and the more As the better. Federal government bonds are rated best of all, as a government can never go broke, while top-rated corporate bonds can also be highly rated.
But it's not just fixed-interest investments that are looking good: all sorts of income-producing assets are offering good returns. Demand for money to fuel the booming Australian economy and a falling away in non-bank lenders arising from the sub-prime credit crisis are helping to push the yields on several bank-bill-and-bond issues to decade-high levels above benchmark rates.
Investment-grade corporate bonds and related instruments are paying close to 9.5 per cent a year. A subordinated debt instrument from Suncorp that matures in June 2011 offers a yield of 9.48 per cent.
Westpac Bank bond maturing in June 2011 offers a yield of 8.5 per cent. Only professional investors need apply for these -- the minimum investment for both is $500,000.
Retail investors gain access to these investments usually through managed funds that invest in them, and pass on the returns.
UBS's Anderson says that with spreads at the widest levels in history and "great opportunities" across the board, conditions are right to earn good returns from bonds, fixed-interest and cash-enhanced style investments.
Body: "We still have cash deposit rates that are higher than what's available from bonds, so it is not surprising that we have seen a trend to cash in this sort of environment," Anderson says.
She says a juicy premium is available on corporate bonds, with some prospects of capital gain if sold before maturity. "An investor would need to have the time horizon to ensure any capital gains, but they could be achieved through funds specialising in bonds."
It is good news for investors even in everyday banking accounts: the Commonwealth's online account called NetBank Saver is paying 7 per cent a year for funds available at call.
Higher rates are available, but there are conditions -- as always, read the fine print. Citibank's offer of 8 per cent interest on its Ultimate Saver product is designed to win over customers with large net deposit balances of as much as $1 million. It will pay 8 per cent a year on deposits from $10,000 to $1 million, but nothing on the portion below $10,000. So if you had only $20,000 to invest, only half of it would earn the high interest rates.
Yet the rate is available at call, or immediately you call for it, which has its appeal. Citibank's director of wealth management, Suvrat Saigal, says: "We'd urge anyone with large deposit balances to weigh up their options for higher interest because we can offer deposit products that the big four locals are currently not offering."
One development investors should watch is the pending arrival of the federal Government's First Home Saver Account. Details are still sketchy, but you can be sure that banks will be offering them from July 1. The Government will offer tax concessions and probably a co-contribution to those who save for their first home.
Sam Wall, head of technical services at Colonial First State, says the Government's co-contribution is likely to range from $750 to $1500 a year based on your marginal tax rate and level of after-tax contributions.