# Bank accounts vs. Govt bonds in light of the Guarantee



## sinner (11 January 2012)

All things considered and not including at call cash for day to day purposes, since the Australian Treasury Guarantee against bank accounts appears to now be infinite in timeline, which implicitly changes my deposit to a giant put against a nominal deposit I supposedly held...

Is there any sane reason I would hold my AUD with a bank term deposit which requires an explicit Government guarantee versus simply holding my AUD as bonds from the Government? Or inversely converting my now Federal Money back to Corporate Money by buying some CBA retail bonds?

Especially in light of the fact that it seems you can buy/sell Gov bonds direct from/to the RBA with only $1000 minimum and corporate bonds (or a corporate bond fund) from a retail broker?

http://www.rba.gov.au/fin-services/bond-facility/

Allowing you to sell the bonds before maturity is also an added flexibility over term deposit.

How does everyone else here feel about continuing as the "socialised backstop" for these banks while they continue to rake in "private profits".


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## Tyler Durden (11 January 2012)

Hey I checked that site out a while ago and couldn't find the interest rate on the bonds???


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## sinner (12 January 2012)

Tyler Durden said:


> Hey I checked that site out a while ago and couldn't find the interest rate on the bonds???




Google "bloomberg ticker aus gov 10 year" to get the notional chart on a theoretical 10y AusGov. You can substitute 10 year for most maturities.

RBA also prints the daily rates on their website in the "Tables and Data" area.

Or just check here daily (you can also see yesterdays yield curve on the same site)

http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/


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## McLovin (12 January 2012)

Why would you buy government bonds? The yield on 10 year bonds is beaten any half decent at call online account and you won't have to worry about price risk (unless of course you plan on holding to maturity).


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## Julia (12 January 2012)

sinner said:


> Google "bloomberg ticker aus gov 10 year" to get the notional chart on a theoretical 10y AusGov. You can substitute 10 year for most maturities.
> 
> RBA also prints the daily rates on their website in the "Tables and Data" area.
> 
> ...



Sinner, is the yield shown on the above link the total yield or is that the 'on top of' part of a fixed yield?  Seems extremely low so hard to imagine that's all there is.

Are the bonds transacted just by buying and selling via Treasury, not traded on any market?  If so, what's the mechanism by which the price alters?

Apologies if these are silly questions:  I have no experience with bonds.


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## McLovin (12 January 2012)

Julia said:


> Sinner, is the yield shown on the above link the total yield or is that the 'on top of' part of a fixed yield?  Seems extremely low so hard to imagine that's all there is.




That's the yield to maturity shown, ie it includes both coupon and principle return at the end of the term. It is the total yield. I'm not quite sure what you mean by "on top of"?



Julia said:


> Are the bonds transacted just by buying and selling via Treasury, not traded on any market?  If so, what's the mechanism by which the price alters?




No, apart from small investors they are not traded through Treasury at all, with the exception of bond auctions (I believe the minimum parcel at auction is around ~$5m, I could be off though). 

There is a push to make the bond market more accessible to retail investors, rather than having to use the RBA.

Eta: The minimum parcel at tender is $1m, according to the AOFM.


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## sinner (12 January 2012)

McLovin said:


> Why would you buy government bonds? The yield on 10 year bonds is beaten any half decent at call online account and you won't have to worry about price risk (unless of course you plan on holding to maturity).




Your view (which seems awful complacent to me) is the exact opposite to mine. But please remember, I am talking about term deposits, not at call cash.

Why would I put my AUD "cash savings" into an a term deposit which requires a Government guarantee to not see an overnight liquidity crisis? 

*In light of the now infinite timeline Guarantee, my "half decent online account" has been converted to nothing but a call against the Treasury! Which I doubt they would be able to fulfill without straight out printing.*

Think about it. In the event of a credit or liquidity crisis in which the "Guarantee" on regular accounts is called into effect, do you think I will be waiting in line for the Treasury to print my nominal balance and eat the equivalent loss in purchasing power? *Hell no*, I will be offloading my Gov bills and notes of various maturities direct to the RBA at the market rate and standing in line before "at call cash" holders as a bondholder in corporates if necessary.

For the record, I'm not necessarily suggesting buying bonds at a 40 year yield low, I am trying to highlight a point about the Guarantee.




Again, this is all in reference to "AUD denominated savings".


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## McLovin (12 January 2012)

sinner said:


> Your view (which seems awful complacent to me) is the exact opposite to mine. But please remember, I am talking about term deposits, not at call cash.
> 
> Why would I put my AUD "cash savings" into an a term deposit which requires a Government guarantee to not see an overnight liquidity crisis?




An Australian government bond is back by the Australian government. An Australian bank account is backed by the Australian government, both directly through the guarantee but also indirectly in the status of the big four as "too big to fail". 

ANZ, CBA, WBC and NAB are too big to fail. They are central to the Australian economy. If they were to fail there is no Australian dollar denominated asset that you would be safe in.

Having said that I don't see any of them failing, they have strong balance sheets. If they need liquidity the RBA can provide it. If they are having difficulty raising funds in debt markets the government can do what it did last time and guarantee their borrowing. If they have a credit event of become insolvent they will be backstopped by the government, even if that means nationalisation. The retail investor guarantee is really just so pensioners can sleep at night. No government will let a big four fail.

If you feel safe in bonds then go for it, I don't lie awake at night hoping my money is OK.


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## sinner (12 January 2012)

McLovin said:


> An Australian government bond is back by the Australian government. An Australian bank account is backed by the Australian government, both directly through the guarantee but also indirectly in the status of the big four as "too big to fail".




The difference being of course that to satisfy the Guarantee the Government would have to print immense amounts of money (despite our nations poor savings rate), whereas bonds are already a liability much higher on the balance sheet. 



> ANZ, CBA, WBC and NAB are too big to fail. They are central to the Australian economy. If they were to fail there is no Australian dollar denominated asset that you would be safe in.




I love it! Everyone is now a speculator, even the savers, betting that the loan they made to the bank is safe.



> Having said that I don't see any of them failing, they have strong balance sheets. If they need liquidity the RBA can provide it. If they are having difficulty raising funds in debt markets the government can do what it did last time and guarantee their borrowing. If they have a credit event of become insolvent they will be backstopped by the government, even if that means nationalisation. The retail investor guarantee is really just so pensioners can sleep at night. No government will let a big four fail.
> 
> If you feel safe in bonds then go for it, I don't lie awake at night hoping my money is OK.




lollll if the balance sheets are so strong why do they need a Guarantee? You are insane if you think it is in effect "just so pensioners can sleep at night", that is nothing but complacency talking. As for "too big to fail" and "will be nationalised" again lol, sure you wait for the banks to be nationalised and then wait in line for the Gov to get to your claim.

I don't lie awake at night hoping my money is OK, mostly because I spend a portion of my day analysing the world we live in, what that means for the fruits of my productive labour and then implementing plans which allow me to sleep best at night.


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## sinner (12 January 2012)

Julia said:


> Sinner, is the yield shown on the above link the total yield or is that the 'on top of' part of a fixed yield?  Seems extremely low so hard to imagine that's all there is.
> 
> Are the bonds transacted just by buying and selling via Treasury, not traded on any market?  If so, what's the mechanism by which the price alters?
> 
> Apologies if these are silly questions:  I have no experience with bonds.




Hi Julia,

My guess is the rates seem low to you because you are used to seeing bank rates, i.e. the compensation of risk for you loaning money to the bank. Since the risk of loaning money to the Gov is much lower, the compensation is commensurately lower.

Compare 3m AUD LIBOR (polled interbank lending rate) vs 3m AUD Gov bill (known in the US as TED spread).


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## McLovin (12 January 2012)

sinner said:


> The difference being of course that to satisfy the Guarantee the Government would have to print immense amounts of money (despite our nations poor savings rate), whereas bonds are already a liability much higher on the balance sheet.




Higher on what balance sheet? The government could absorb a failed bank without the need to print money...unless all the banks assets failed in which case we'd have much bigger problems.




sinner said:


> I love it! Everyone is now a speculator, even the savers, betting that the loan they made to the bank is safe.
> 
> 
> 
> ...




One question: During the last 5 years was there a bank in any developed country in which depositors lost a cent of their money?


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## sinner (12 January 2012)

McLovin said:


> One question: During the last 5 years was there a bank in any developed country in which depositors lost a cent of their money?




You mean aside from the bank run in South Korea last year in which 8 banks failed? Or the banks which failed in the UK and which George Osborne ruled in Jun lat year large depositors would not be made whole? Incubator Bank of Japan? What about FirstTier Bank Colorado and Enterprise Banking in Georgia failed, the FDIC could not find a purchasing entity so people lost deposits. During 2009 ten banks failed in the US which could not be sold off by the FDIC! That means at least some depositors at all those banks lost money! First Arizona Bank failed in 2010 and depositors lost almost 6 mil USD. What about Danish bank Amagerbanken A/S, depositors and bondholders impaired to the tune of 41c on the dollar! Gee this bit sounds familiar

"According to Bloomberg, bondholders of senior debt, *including bonds formerly guaranteed by the government*, will face write-offs of about 41%. "The bank estimates its assets amount to about 59 percent of liabilities."

Would you like me to keep going?


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## McLovin (12 January 2012)

Fair enough. I assume they were covered by deposit insurance in most of those instances. And the losses were by those over the insurance limits.


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## sinner (12 January 2012)

McLovin said:


> Fair enough. I assume they were covered by deposit insurance in most of those instances. And the losses were by those over the insurance limits.




You can assume that if you like, but except in a few cases (like the George Osborne thing), you would be wrong. 

Then of course, there is this:

http://boingboing.net/2009/02/09/rep-kanjorski-550-bi.html


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## McLovin (12 January 2012)

sinner said:


> You can assume that if you like, but except in a few cases (like the George Osborne thing), you would be wrong.




FDIC says it the depositors were insured up to their insurance limits. Are you saying they were not? 

Further, the Japanese regulator said the same about Incubator.

Of course we're not really discussing banks with systemic importance.


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## sinner (12 January 2012)

I won't disagree with you about FDIC, but I would raise two points 

1. FDIC is basically unfunded through 2017 so however they have managed to make depositors whole since 2008, it has been through the use of monetary magic.
2. As the Icesave incident and the FDIC "DIF" and many other examples show, the purported insurance funds are never large enough to handle a crisis involving more than one bank.


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## Julia (12 January 2012)

McLovin said:


> That's the yield to maturity shown, ie it includes both coupon and principle return at the end of the term. It is the total yield. I'm not quite sure what you mean by "on top of"?



Thanks, McLovin.  I was surprised that the yield was so low, so vaguely (and ignorantly, obviously) wondered if it could be like e.g. Rabodirect and other banks which offer a base rate plus a 'bonus rate' on top if particular conditions are met.

I suppose I thought that if Sinner considered the bonds to be better or equal an investment to term deposits, the yield would be roughly similar.  He has explained that he believes the bonds offer greater security.



sinner said:


> Hi Julia,
> 
> My guess is the rates seem low to you because you are used to seeing bank rates, i.e. the compensation of risk for you loaning money to the bank. Since the risk of loaning money to the Gov is much lower, the compensation is commensurately lower.



OK, thanks for explaining.   I must fall amongst the complacent.  Don't at this stage feel worried about the security of funds in banks.


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## Wysiwyg (12 January 2012)

McLovin said:


> ANZ, CBA, WBC and NAB are too big to fail. They are central to the Australian economy. If they were to fail there is no Australian dollar denominated asset that you would be safe in.



Yes you would be hard pressed to find an Australian concerned about their funds in these banks at present. They are well managed, cognitive of worldly events, meet their obligations and have a majority of Australians transacting with them. Good enough guarantee for 99.9% of rational thinking people.


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## McLovin (12 January 2012)

sinner said:


> I won't disagree with you about FDIC, but I would raise two points
> 
> 1. FDIC is basically unfunded through 2017 so however they have managed to make depositors whole since 2008, it has been through the use of monetary magic.
> 2. As the Icesave incident and the FDIC "DIF" and many other examples show, the purported insurance funds are never large enough to handle a crisis involving more than one bank.




That's fair enough. 

Although, it is important to remember that it's extremely rare that a government would have to cover every dollar of liabilities from its own funds. As I'm sure you're aware, banks are highly leveraged, usually a 4-5% of loans going bad is enough to send them broke. That being said, if you have a look at say Westpac's balance sheet (they're all pretty much the same) it has ~$620b in assets against $342b in deposits, on equity of $40b. When you consider depositors rank ahead of all other liabilities (until covered bonds are introduced) that's a pretty substantial buffer.


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## sinner (12 January 2012)

McLovin said:


> That's fair enough.
> 
> Although, it is important to remember that it's extremely rare that a government would have to cover every dollar of liabilities from its own funds. As I'm sure you're aware, banks are highly leveraged, usually a 4-5% of loans going bad is enough to send them broke. That being said, if you have a look at say Westpac's balance sheet (they're all pretty much the same) it has ~$620b in assets against $342b in deposits, on equity of $40b. When you consider depositors rank ahead of all other liabilities (until covered bonds are introduced) that's a pretty substantial buffer.




Trying really hard to not to not giggle after realising you understand the highly levered nature of these balance sheets and yet you claimed earlier "they have strong balance sheets".

Glad you brought up covered bonds, since according to APRA



> APRA has today amended Prudential Standard APS 120 Securitisation (APS 120) to reflect commencement of the Banking Amendment (Covered Bonds) Act 2011 (the Covered Bonds Act). The Act has modified the preference provisions of the Banking Act 1959 to *allow for the issuing of covered bonds by ADIs*. APRA has accordingly* removed the prohibition on the issuing of covered bonds* from paragraph 7 of APS 120. The new APS 120 takes effect when it is registered on the Federal Register of Legislative Instruments. It is also available from APRA’s web site (http://www.apra.gov.au). APRA will make similar amendments to the new APS 120, which incorporates enhancements to the Basel II Framework in Australia and t*akes effect from 1 January 2012.*




*Depositors are no longer at the top of the list (just as fast as the banks can borrow). * At the time the above letter was released, the Lowy Institute actually distributed a piece about how they thought this would make the Guarantee useless in the event of another overseas liquidity crisis. I will try and find it.



> Yes you would be hard pressed to find an Australian concerned about their funds in these banks at present.




and as we know, the herd usually proves to be correct  ...


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## McLovin (12 January 2012)

sinner said:


> Trying really hard to not to not giggle after realising you understand the highly levered nature of these balance sheets and yet you claimed earlier "they have strong balance sheets".




I'm getting a little tired of the condescending tone, so I'll leave you to it...


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## Tyler Durden (12 January 2012)

sinner said:


> Hi Julia,
> 
> My guess is the rates seem low to you because you are used to seeing bank rates, i.e. the compensation of risk for you loaning money to the bank. Since the risk of loaning money to the Gov is much lower, the compensation is commensurately lower.
> 
> Compare 3m AUD LIBOR (polled interbank lending rate) vs 3m AUD Gov bill (known in the US as TED spread).




I see, that's a very good explanation. But I wonder, why would anyone buy gov bonds then? I mean, it sounds like you really gotta believe that a bank collapse is a reali likelihood to do it for the lesser returns.


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## Starcraftmazter (13 January 2012)

In my view one would have to be super lazy not to not be able to find investments with a higher ROI that are at least somewhat subjectively just as safe. Hell even gold is better than governments bonds imo.

Why hold your life savings in worthless paper issued by a worthless government that can't do anything right?


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## Starcraftmazter (13 January 2012)

I was just thinking more about this, presumably you mean longer dated bonds? Then aren't you taking a direct position on the yield of our government's bonds?

Take 10 year for example which yield about 200bps lower than long dated term deposits, there is no way in hell that the yield will not skyrocket during these 10 years. Unless you want to take the position that we really do have a great economy.

If you mean short dated bonds, then what is the point??? I just don't understand 

Unless you imply to have millions upon millions of capital that you wish to park safely somewhere? Do you?


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## sinner (13 January 2012)

> I see, that's a very good explanation. But I wonder, why would anyone buy gov bonds then? I mean, it sounds like you really gotta believe that a bank collapse is a reali likelihood to do it for the lesser returns.




Either that, or you really have to wonder, just what those banks are doing to get that extra yield? We are so far past the old "borrow for 3%, loan for 6%, golf at 3pm" banking model. Look at all those Germans and Brits who chased yield in Icesave for example.



Starcraftmazter said:


> In my view one would have to be super lazy not to not be able to find investments with a higher ROI that are at least somewhat subjectively just as safe. Hell even gold is better than governments bonds imo.
> 
> Why hold your life savings in worthless paper issued by a worthless government that can't do anything right?




The discussion is just about AUD denominated savings, that is all. Nothing to do with gold or other investments (which I hold). It isn't a bad idea to have one or two years worth of living expenses saved up in the local currency to pay emergencies, or if unemployed rent, bills, taxes etc, where do you put it all? In an online account which would have collapsed 4 years ago without a Government guarantee? Come on. Why would I put it in gold when the Government and my landlord don't accept gold? Why would I put it in equity and risk a nominal capital loss? 



> I was just thinking more about this, presumably you mean longer dated bonds? Then aren't you taking a direct position on the yield of our government's bonds?




Only if you sell before maturity.



> If you mean short dated bonds, then what is the point??? I just don't understand




The point has been repeated over and over, and obviously escaped you. Nevermind.

Nobody who invests in term deposits holds all their money at a single maturity, the best play IMHO is to have it spread across the curve.


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## Starcraftmazter (13 January 2012)

sinner said:


> The discussion is just about AUD denominated savings, that is all. Nothing to do with gold or other investments (which I hold). It isn't a bad idea to have one or two years worth of living expenses saved up in the local currency to pay emergencies, or if unemployed rent, bills, taxes etc, where do you put it all? In an online account which would have collapsed 4 years ago without a Government guarantee? Come on. Why would I put it in gold when the Government and my landlord don't accept gold? Why would I put it in equity and risk a nominal capital loss?




I agree 100% with you, but then would you not want to have that money in term deposits that yield higher than 10 year bonds? 

Do your living expenses exceed $250,000 for 2 years?




sinner said:


> Only if you sell before maturity.




But doesn't that defeat the purpose of having emergency money - ie. what happens if yields suddenly jump and you need that money at that same time?


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## mazzatelli (14 January 2012)

Interesting sinner

My salary is denominated in EUR, so never felt the same "security" over there as with people here in re. to banks.

If you do carry this out, I am suspecting you plan to spread the bond holdings over the term structure? Duration hedged with exposure to convexity?


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## Wysiwyg (14 January 2012)

sinner said:


> and as we know, the herd usually proves to be correct  ...



Well, the shep*herd* usually proves to be correct.


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## MrBurns (22 April 2013)

I just found out the Govt guarantee is now down to $250k from Jan 2012, don't know how I missed that.

Anyone in here feel strongly enough about the risk to split their deposits ?


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## Julia (22 April 2013)

MrBurns said:


> I just found out the Govt guarantee is now down to $250k from Jan 2012, don't know how I missed that.
> 
> Anyone in here feel strongly enough about the risk to split their deposits ?



Yes.  No reason not to spread it over several institutions when their rates were worthwhile.
I also always do multiples in TDs of $50K so if you want some of the funds inside the term, you don't lose interest on a large amount.


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## MrBurns (22 April 2013)

Julia said:


> Yes.  No reason not to spread it over several institutions when their rates were worthwhile.
> I also always do multiples in TDs of $50K so if you want some of the funds inside the term, you don't lose interest on a large amount.




The less you put in the lower the rate though isn't it ?

I guess no point taking a risk though...


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## Julia (22 April 2013)

MrBurns said:


> The less you put in the lower the rate though isn't it ?



I suppose it depends on what sort of amounts you're talking about.  I'm sure if you are prepared to give the bank $10M for five years they'll reward you accordingly.

Apart from those really large amounts, however, I've never had any institution reduce the rate I was applying for when I've said I wanted it done in multiples of $50K.

Have you experienced being offered considerably more for a large deposit?  What sort of difference on what sort of $ amount?


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## MrBurns (22 April 2013)

Julia said:


> I suppose it depends on what sort of amounts you're talking about.  I'm sure if you are prepared to give the bank $10M for five years they'll reward you accordingly.
> 
> Apart from those really large amounts, however, I've never had any institution reduce the rate I was applying for when I've said I wanted it done in multiples of $50K.
> 
> Have you experienced being offered considerably more for a large deposit?  What sort of difference on what sort of $ amount?




Never tested the lower amounts but anything over $500k they seem to refer to Treasury for the best rate, guess it doesn't really matter the difference is probably incremental.


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## Julia (22 April 2013)

I doubt they refer to Treasury, but yes, they'll ask the appropriate division of their Head Office if they can do a higher than advertised rate.  I've never found more than about 0.5% improvement which to me wouldn't justify not using the smaller multiples.
What does work sometimes, depending on the bank's needs at the time, is getting them to match what is being offered elsewhere.  It worked for me with SUN when WBC was offering 8% but only on personal accounts, not SMSFs, and I asked SUN if they would match it, though their advertised rate was more than 1% below that.
The phone call to head office happened and it was an immediate yes answer.  I'd be very surprised if that were to be replicated now when banks are far more replete with deposit funds.


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## MrBurns (22 April 2013)

Julia said:


> I doubt they refer to Treasury, but yes, they'll ask the appropriate division of their Head Office if they can do a higher than advertised rate.  I've never found more than about 0.5% improvement which to me wouldn't justify not using the smaller multiples.
> What does work sometimes, depending on the bank's needs at the time, is getting them to match what is being offered elsewhere.  It worked for me with SUN when WBC was offering 8% but only on personal accounts, not SMSFs, and I asked SUN if they would match it, though their advertised rate was more than 1% below that.
> The phone call to head office happened and it was an immediate yes answer.  I'd be very surprised if that were to be replicated now when banks are far more replete with deposit funds.




They call it Treasury but it would be internal no doubt, I really feel like taking the plunge into shares instead of just letting it languish in a TD...I've done so well out of TLS, but I don't think it's the right time......but is it ever ?


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