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Are term deposits attractive right now?

Last year, like many others, I had spare cash and decided to put some in term deposits, across various terms of up to 12 months, with rates ranging from 4.85% to 5.25%. Now, as more of these term deposits are about to end, I must decide about whether to roll these over or look for alternative uses for the cash.

Everybody's circumstances are different, and in my case, the initial move into term deposits was driven by a need to park money for the short-term, and yields were attractive enough to make this a decent option.

Was it a good decision? If you look at the performance of stock markets over the past 6-12 months, maybe not. The ASX 200 is up more than 10%, including dividends, over the past year, while the S&P 500 has soared by 21%. Year-to-date, the ASX has climbed 3%, and the S&P 500 has surged by 9%.

Stocks weren’t the only place that I could have put the money, though. I could have gone into bonds, and the performance of bonds has been anything but stellar. For instance, the yield on a ‘risk-free’ Australian 10-year government bond has increased from 3.39% to 4.42% over the past year. And when bond yields rise, prices fall.

Another option would have been to build a traditional 60/40 equities/bonds portfolio with the money. If I’d gone with ASX 200 equities and the Australian 10-year government bond, it would have marginally trailed my return from term deposits. Other variations on the portfolio, such as having international stock exposure, may have lifted these total returns.

Overall, the decision to put the cash in term deposits was a low-risk option that provided decent short-term income, though there was an opportunity cost as stocks shot up during that period.

The decision now is if it’s worth rolling over these term deposits or not.

Current term deposits on offer

Let’s first look at what current term deposits offer. The big 4 banks all offer similar term deposit rates over 12 months. CBA has a ‘special offer’ rate of 4.75% p.a. for 12 months, ANZ and NAB have 4.70% over same period, while Westpac offers 4.70% p.a. over 11 months.

Interestingly, Macquarie Bank is at 4.65% p.a. for a 12-month term deposit. Yet, it offers a higher 4.85% p.a. 3-month term deposit.

ING Bank has a 4.90% p.a. term deposit for 12 months, while Judo Bank is even better at 5.10% p.a.

The good news is that competition in the deposit space is healthy, especially with the rise of online banks like Judo. That’s led to a reduction in many of the terms and conditions attached to term deposits in prior years, though it’s still worth checking the fine print on these offers.

Bank savings and money market funds

What are about the alternatives to term deposits – how do they stack up?

Unfortunately, the savings deposit rates at banks are not as competitive, and remain pitiful. A popular alternative is cash ETFs, where you can get good yields and liquidity.

Betashares AAA is the most popular cash ETF and currently offers 4.44% p.a. interest rate. ISEC has a higher yield as it can hold up to 20% in floating rate notes – these carry greater potential return with greater risks than cash.

Cash ETFs offer more attractive yields than bank saving deposits. However, they still trail term deposits, with the proviso that the latter locks up money for a period of time (and generally you need to give a month’s notice to not incur penalties).

Bonds

This time last year, investors poured money into bond funds and ETFs, and that bet hasn’t paid off so far. Bonds are now in their fourth year of a bear market.


Source: Trading Economics

The question is whether bonds offer value here. The yield on a risk-free 10-year government bond is 4.42%, not as high as that of major bank term deposits. And I remain cautious on bonds for a few reasons:

  1. Though bond yields have risen, they still aren’t high versus long-term history. Some investors jumped on bonds last year as yields were finally offering something compared to the near 1% during the pandemic. That turned out to be a classic case of recency bias – just because bond yields rose from all-time lows didn’t make them great value.
  2. History shows that bond markets move in long cycles of 30-40 years, and therefore this bear market may have some way to go. History doesn’t repeat, and circumstances are always different, but it’s certainly worth keeping in mind given the incredible bull market in bond markets from 1981-2020.
  3. Recent decades of negative correlation between nominal stock and bond returns have likely come to an end. This may have significant implications for the construction of investment portfolios. Investors had got used to the negative correlation, which meant that when bonds went up, stocks invariably came down, and vice versa.  Yet as MFS’ Robert Almeida showed in a recent Firstlinks article, positive long-term correlation between stock and bond returns is the norm, and we seem to be reverting to that pattern. If right, it means that bonds can’t be relied upon to provide a ballast for portfolios when stocks go down.

That said, bonds should still perform well during certain economic environments including deflation and recession. Also, better yield can come from corporate bonds, private credit, and part-debt instruments like hybrids, albeit with higher risks attached.

Equities

What about equities, then? After a great run of late, they don’t appear cheap. The ASX 100 is trading at 17.2x 2024 earnings, compared to a long-run average of 15.7x. Outside of financials and commodities, the ASX 100 trades closer to 21x. And stocks outside the top 100 are valued at 17.7x earnings.

Taking the 17.2x price-to-earnings ratio (PER) of the ASX 100, that equates to an earnings yield of 5.8%. That isn’t much of a premium to ~5% bank term deposit rates given the greater risks which come with equities. 

Overseas, the picture isn’t much better. The S&P 500 trades at a trailing PER of almost 27x, which equates to a paltry earnings yield of 3.7%.

S&P 500 PE Ratio

Source: Robert Shiller

Emerging markets are the one area of global equities which offer more value, and better earnings yields, though that’s been the case for some time and is unlikely to change until China turns around. And emerging markets entail greater risk too.

In sum, while equities are great long-term vehicles, the short-term looks more balanced with valuations a little stretched both here and overseas. And cash including term deposits offer real competition to the likes of equities at this junction.

Term deposit attractiveness will depend on your circumstances

The answer for whether term deposits are attractive will depend on your personal circumstances. Whether you want income or capital gain. Whether you’re wanting to park money for a short period or invest long-term. Whether you are looking to take on more risk or not.

In my case, I’ve decided to roll over my term deposits in Judo Bank at a rate of 5.10% for durations of 6 to 12 months. I like how they offer competitive yields to other assets, with less risk involved. I also like that unlike a year ago, the term deposit rates are higher than inflation rates, which means I’m earning a real return.

The key risks with my decision are:

  • We get a soft economic landing and risk assets such as stocks continue to climb at the expense of less risky assets such as cash.
  • Inflation re-ignites, resulting in a negative real return on my cash.
  • We unexpectedly enter recession, where cash trudges along, but bonds are the major beneficiary.

All up, the risk versus rewards for cash look decent going forward.

 

James Gruber is an assistant editor at Firstlinks and Morningstar.com.au.

 

66 Comments
AlanB
May 14, 2024

The current inflation rate is 3.6% so <5% bank term deposit interest rates leave us with a trivial real return. Have a look at PCI for monthly income at a more attractive rate than now offered by any TDs. MOX and MOT are alternatives, but higher risk. Hybrids with a margin of >2.5% above the BBSR are good value, but we are now prevented from buying them at the $100 issue price, (unless a so called sophisticated buyer) which reduces yield for retail buyers.

SMSF Trustee
May 12, 2024

It's not a trivial real interest rate on a risk free investment. And it's the best real return TD's have provided for a while - well except for when they were over 5% a few months ago when I locked in 12 month terms on my holdings.

If I were to invest in those other things you mentioned it wouldn't be instead of my TD holdings, it would be because of a different investment purpose within my fund. So the yield comparison is actually irrelevant in my mind.

Dudley
May 12, 2024

"current inflation rate is 3.6% so <5% bank term deposit interest rates leave us with a trivial real return":
"not a trivial real interest rate on a risk free investment":

nominal interest rate 5%, tax rate 15%, CPI 3.6%; real net interest rate:
= ((1 + (5% * (1 - 15%))) / (1 + 3.6%)) - 1
= 0.63% [ doubling time = log(2) / log(1 + 0.0063) = 110.3695728 y ]

tax rate 0%:
= ((1 + (5% * (1 - 0%))) / (1 + 3.6%)) - 1
= 1.35% [ doubling time = log(2) / log(1 + 0.0135) = 51.69003462 y ]

Dudley
May 12, 2024

Two reasons for taking risk: necessity and folly.

Knowing time to death and ratio of capital to expense helps determine the real return necessary:
https://freeimage.host/i/image.JV1zXJp

Real return required helps determine risk.

AlanB
May 13, 2024

Correction: MXT and MOT

Robert Bye
May 13, 2024

The crime is that the goverment is effectively taxing inflating when we pay tax on interest. They create inflation then they tax it....

Colin
May 12, 2024

I wonder why Bank of Queensland (BOQ) are not included in these comparisons. They offer competitive rates AND have a branch near me!

Terry Brown
May 12, 2024

I invest with Balmain Private. They are like de facto term deposits. Not guaranteed of course but return around 9% pa. LVR is usually no more that 60% and I am comfortable with that

Stephen
May 13, 2024

Yes I have been investing with them for probably 5 years now and I was getting 5% when interest rates were close to zero. You don't need to be a wholesale investor.

John B
May 11, 2024

I have close to $200K invested in ING Orange accounts earning a respectable 5.5% at call. Yes, there are a couple of conditions but these are very easily met. This return is greater than any alternative you put forward and much more flexible than a fixed term deposit you recommend.

James Gruber
May 11, 2024

Hi John,

Sure, but the conditions aren’t easy, aren’t flexible, and not a lot of people, including me, would want to open an account because of them (different if you already have an account).

ING's highest variable rate
For customers who also have an Orange Everyday bank account and do these things each month:
1. Deposit at least $1,000 from an external source to any personal ING account in their name (excluding Living Super and Orange One)
2. Make 5 or more settled (not pending) eligible ING card purchases
3. Grow their nominated Savings Maximiser balance (excluding interest earned for the current month).
When the criteria is met in a calendar month, the benefits and additional variable rate will apply in the next calendar month. Available on one account for balances up to $100,000.

CLK
May 12, 2024

Sure I totally agree when already set up this is not difficult and it is super easy viz automate 1, 5 swipes for 2 and grow 3 per your conditions above..

Muz
May 12, 2024

I find the best & easiest ongoing saver accounts are:
AMP Saver account paying 5.4% as long as you deposit $1000+ every month.
Ubank saver account paying 5.1% as long as you deposit $200 month.
Aust Unity Freedom saver account paying 5.2% with no restrictions.

Terry
May 12, 2024

I have accounts with both Ubank and Mystate returning 5% pa. These are not “honeymoon” rates. The conditions I have to meet are easily achieved

Gerald
May 12, 2024

I have a ING Everyday and a ING Savings Maximiser account but missed the Growth by a $100 (my miscalculation)and lost my interest bonus that would have been about $350 for the month.
Very UN-AUSTRALIAN ING.

Geoff F
May 12, 2024

Hi John B,
Re your "I have close to $200K invested in ING Orange accounts earning a respectable 5.5% at call.":
My understanding is that it's the ING SAVINGS MAXIMIZER account that can earn 5.5% (subject to a few conditions) but only earns that rate on one account on the first $100K, with balances over that currently earning 0.55%.
Could u clarify how you earn 5.5% on close to $200K.

John Barker
May 12, 2024

Easily achieved. Note I said “accounts” plural. One account for me and one for my wife. Not difficult at all.

Geoff F
May 13, 2024

Thanks for your reply John Barker.
Clarification was requested because you actually said "I have ... accounts ...", but as you have now indicated, the (close to) $200K is split between your wife and yourself, which clears things up.

Robert Maddern
May 12, 2024

I thought the ING rate stopped at $100,000.00?

Muz
May 11, 2024

These saver accounts are currently at call:
Rabo Bank 5.75% for the first 4 months and then transfer to Macquarie Bank 5.5% for the first 4 months and then transfer to AMP Saver account 5.4% ongoing.

Tony
May 11, 2024

Both Rabo and Macq are introductory specials only for new members. They both then drop to rather non-competitive rates, currently 4.4 and 4.75% respectively.

Tony
May 10, 2024

No love for AMP Saver Account @ 5.4% on call?

Stephen E
May 11, 2024

Lots of T&Cs, no thanks.

Tony
May 11, 2024

Deposit $1000 per month, which you can immediately withdraw? It's literally 1 minutes work for 5.4% on-call interest. Are there any onerous conditions I have overlooked?

Dudley
May 11, 2024

"Deposit $1000 per month, which you can immediately withdraw":

Or manually, or by schedule, transfer $1,000 each month from Saver to another AMP account.
Then, in the same month, manually immediately, or scheduled next day, transfer back to Saver.

Stephen E
May 11, 2024

You have to hold an AMP wealth product in addition to the savings account. No thanks.

Dudley
May 11, 2024

'If you hold an eligible super, pension or investment product, you may also be eligible for an additional Wealth Bonus Variable Interest Rate of 0.00% pa on balances up to $250,000.':

Always best to take time to read the terms & conditions; at least until a term or condition is unacceptable.

SMSF Trustee
May 10, 2024

I think articles like this ask the wrong question.

The right question is: if your risk profile means that you invest in TDs then are longer term rates attractive?

The level of TD interest rates at any point in time should have no bearing on whether or not you invest in them. If they suit your risk tolerance, investment time horizon and overall investment strategy then you'll have held them for a while and will continue to hold them.

I do. But when 1 year TD rates were over 5% a few months ago I started rolling them into 12 month terms. In my view they were good value then. Not so much now so when my next one matures in June I will have to consider rolling for less than 12 months.

I will soon reduce my TD holdings because they've been in place to provide capital protection for pension phase income payments. Not because of their interest rate.

Michael Oakley
May 10, 2024

Why no mention of bank hybrids?They rank in front of bank shareholders, many come with franking credits and can free up your money at call.

Stephen E
May 10, 2024

He did mention them, re-read it.

charles
May 10, 2024

As easy as falling off a log to invest in a TD.....in your personal or joint names. Once you say it's an SMSF it is a nightmare in providing information to verify it is all above board. This includes having to present an original (not copy) of the trust deed at a branch. Judo was one bank that managed to allow us to open a TD for the SMSF over the phone

Bob
May 12, 2024

I’ve had this frustrating experience too. My SMSF (established in 1990) has had transactional accounts at WBC for many years but when I tried to open a TD last year they wanted me to produce the original trust deed. The trust deed and attaching regulations which form part of it have changed many times, to meet each new piece of legislation introduced by the politicians over the last 34 years. Also the SMSF held units in two listed investment trusts, PGG and NBI, which recently converted from listed to unlisted trusts. In both cases the Responsible Entity required me to produce the original trust deed or sell the units on market before the conversion date, at a loss. It’s all to do with anti money laundering, they said. It’s hard for me to see how money held in transaction accounts or listed trusts is OK from an AML perspective, but trying to put it in TDs or unlisted unit trusts is not. Bureaucracy gone mad, IMHO.

Rod in Oz
May 10, 2024

Good on you Dudley; always pertinent comments :)

Peter
May 10, 2024

Thanks. I had considered the rounding up that you speak of, but my main concern was with the positive figure originally quoted and the negative figure generated by the calculation. Your original comment showed a positive 0.2% but the calculation generates a negative 0.17%. I know that excel will represent a number as negative when the format is set to accounting and wondered if something similar was happening. Your latest comment makes me think that the calculated result is actually a negative 0.17%. Would you agree? BTW - Thanks for adding these calculations, I find them very helpful.

DanM
May 10, 2024

Why can't superfunds get returns for cash that are closer to bank TDs. I don't understand. Many of us have to stay within the bounds of our industry funds.

DanM
May 10, 2024

Why can't superfunds get returns closer to bank TDs. I don't understand. Many of us have to stay within the bounds of our industry funds.

John
May 10, 2024

I’m with you Dan 100%. I’m a member of Australia’s largest Super fund and I record the performance of their cash investment option every month. When rates started to rise, I compared the Fund’s return with other financial institutions. There was always a marked difference in favour of Banks etc. Considering my Fund’s size, I could not understand why they consistently delivered below par returns. I wrote to them seeking an explanation and the reply I received completely ignored the simple question that I raised. I lodged a complaint with AFCA and to date, my Super Fund has not responded to the matter AFCA raised on my behalf. Like Dan and myself, many others must be wondering why super fund behemoths deliver uncompetitive returns on their billions of cash holdings when my local bank or credit unions consistently outperform them. Hopefully, we’re not alone in querying this perplexing situation.

George B
May 10, 2024

The "marked difference" is presumably the Superfund's management fee that is a fixed percentage of the funds under management, unlike an SMSF that has a fixed compliance fee irrespective of the funds invested in the SMSF.

Geoff
May 10, 2024

It's because the "cash" option in a super fund is not actually cash.

I worked for a major retail fund - although not in the investment area. My colleagues in said investment area used to explain to me what the investment described as "cash" actually was, and it wasn't cash as we know it, and it was unable to get close to bank cash rates. Some type of insurance product from memory.

I'd routinely ask them why they just didn't open up a UBank account for the fund's cash ... I thought it was funny, but they didn't. Eventually they got into regulatory trouble over that "cash" option because the rates weren't high enough to what was available in the market outside of super.

Topic for some journo with an interest in super to dig into, perhaps.

Jeff
May 10, 2024

My Member Direct Transaction Account currently paying 5.25%

Istvan
May 12, 2024

Banks also differentiate between personal and business-like accounts (why?)

Boglehead
May 09, 2024

Dudley is soberingly correct in that "real" return is minimal, BUT at least its not worse and into negative territory after inflation (whoops, maybe it is in negative territory as per Peter).

So, this exercise in finding best safe yield is NOT to end up ahead, but rather NOT come out behind. Reducing loss at the margins. Thus need to do some yield chasing as defensive strategy in order not to lose.

Andre
May 09, 2024

James you seem to have forgotten to mention another alternative, Hybrids, especially major bank hybrids or hybrid ETFs which have provided returns of up to 10% over the past 12 months. Why invest in the banks' term deposits at 5% when you could have invested in these banks' capital structure with double the returns.

Stephan E
May 09, 2024

He did mention them, read it again.

Greg
May 09, 2024

Check out Rabobank Australia.
12 month TD 5% but they also have a Premium Saver account which has a rate of 5% providing you add a minimum of $200/mth. Their High Interest Saving Account has a 4 month intro of 5.75%.

DavidMC
May 09, 2024

Investor age is significant. We the first of the baby boomers are well into our seventies so cannot rely on a 10-year investment timeframe. Our SMSFs probably have to be cashed out on death. A good proportion of funds in TD safety at approx. 5% has great attraction.

Dudley
May 09, 2024

"well into our seventies so cannot rely on a 10-year investment timeframe":

Return of capital over 10 years is a larger amount than return of interest over 10 years.

Steve
May 09, 2024

ETF's are good option particularly floating rate bonds, hybrids etc. But be aware a large chunk of the returns are taken as fees (brokerage to buy/sell, mager fees) for the cash ETF's, particularly if held for a short term (<1 yr).

Peter
May 09, 2024

Hybrids? MOT/MXT etc, private debt?
Up the risk curve but some well established providers around.

Kerry Henry
May 09, 2024

I have some TDs with LaTrobe @ 6.75% & tax free in our SMSF. Sure, not covered by Gov Deposit Guarantee but owned by huge Canadian Asset Manager, Brookfield. I sleep easy.

John
May 10, 2024

Thanks for the tip. We needed to park funds pending a home purchase. Ubank offered 5.1% at call for the first $250k. We have 2 of them. St George Bank ditto, 2 of them. That's $1m at call. Within our SMSF Judo is the go, where we have a soon-to-expire $200k 6 month TD paying 5.1%. It would roll over at 5%.

Tony
May 11, 2024

You would do well to read reviews of LaTrobe's mortgage lending practices (which is presumably how they finance your 6.75%). Jacking up mortgage rates to 11%, huge $10K exit fees. It doesn't sound like good, sustainable business practice. As always, do your own research.

Former mortgage trust manager
May 11, 2024

Mortgage funds are a valid asset class and investment, but they are not and never have been a "place to park funds pending a home purchase" or an alternative to TD's or bank accounts.

Sure, most of the time everything works out OK and you can get your money at call. But when things go wrong they can go really wrong and you either lose your capital or it can take a few years to extract funds as the manager works their way out of the problem loans.

Worst case examples - think Estate Mortgage in the 1980s.
Examples of difficult times - think most mortgage trusts in the GFC.

Geoff F
May 12, 2024

Kerry,
That 6.75% you're earning isn't in a Term Deposit, it's in a "Term Account", which is a different kettle of fish and higher up the risk curve. I suggest checking the T&Cs.

CC
May 09, 2024

I have just yesterday taken a 12 month ANZ term deposit in my Netwealth Super Account at 5.17%
Earlier this year I have taken 3 other 12 month term deposits ANZ 5.1%, ANZ 5% and
BOQ 5.3%.
Minimum entries 10K each.

Dudley
May 09, 2024

'Netwealth Super Account":

No mention of $250,000 government guarantee:
https://www.netwealth.com.au/nw/Access/Wrap-Services/Term-Deposits

Therefore, not covered, same return as direct TD, higher risk.

CC
May 09, 2024

Do you really think our banks are at high risk of default...
The returns are not the same as quoted in this article ( below 5% )

Dudley
May 09, 2024

"banks are at high risk of default":

Always. Hence government guarantee.

CC
May 09, 2024

The guarantee was brought in due to the GFC. Our banks didn't default during the GFC anyway.

Dudley
May 09, 2024

"banks didn't default during the GFC":

Due to the government guarantee.

Requires omnipotence to predict the absence of a future 'GFC' scale event.

Maurie
May 09, 2024

Do term deposits come under the Government's $250k bank deposits guarantee (which I assume is still in force)? If you are looking for capital stability rather than capital gain, I would have thought holding a 10Y government bond through to maturity would rank higher than a term deposit with a bank.

SMSF Trustee
May 10, 2024

Yes Maurie. They are deposits. As long as they're with an approved deposit-taking institution then for each investor there's a capital guarantee on $250k in at-call or term deposits per institution. I have more than $250k in TDs in my fund and thus have them with a few different banks so the lot is like a short term government bond at a much better interest rate.

Ten year Government bonds do give you that longer term security of capital value, if held to maturity, but if you need the capital in a shorter time period then they aren't stable in value.

Dudley
May 09, 2024

"ING Bank has a 4.90%" ... "worth checking the fine print on these offers":

'Business Term Deposits' / 'SMSF Term Deposit'
'A minimum combined balance of $50,000 is required across any Business Optimiser and Business Term Deposit accounts held in your business entity's name.'
https://www.ing.com.au/superannuation/smsf-term-deposit.html

12 months: 2%

Dudley
May 09, 2024

"depend on your personal circumstances" ... :

and tax rate.

nominal interest rate 5%, tax rate 31.5%, CPI 3.6%; real net interest rate:
= ((1 + (5% * (1 - 31.5%))) / (1 + 3.6%)) - 1
= 0.2%

Peter
May 09, 2024

Just out of interest, when I add that calculation into excel, I get -0.17% not 0.2%.

In other words adding = ((1 + (5% * (1 - 31.5%))) / (1 + 3.6%)) - 1 into an Excel spreadsheet returns -0.17 not 0.2%

Could you please confirm your calculation?

Dudley
May 09, 2024

"I get -0.17% not 0.2%":

= -0.2% (rounded to 1 decimal place)

My typographic error.

 

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