Interest rates - why focus only on borrowers?

[McLovin]

Aus has a Sep 2030 CPIadjusted Govt bond - yields about 0.9% at the moment.

0.9% + CPI?

 

[craft]

0.9% + CPI?

Capital value is adjusted by CPI. Yield paid on adjusted capital.


http://www.aofm.gov.au/content/_download/Treasury_Indexed_Bond_Information_Memo_21_July_2011.pdf

 

[Julia]

Couple of things...

1) Non means tested pension payments; Warren Buffett and Bill Gates are eligible for the pension in the US. And they wonder why they're running out of money!

The same applies in New Zealand. However, the pension is included in overall taxation so the government claws much of it back if it's going to the more wealthy. (I am avoiding any comment on tax dodges.)

2) The availability of long dated inflation protected treasuries. At retirement a retiree can buy a 30 year inflation adjusting US treasury. They won't lose purchasing power and they likely will never have to worry about reinvestment risk. It's actually a really good product.

Does sound useful. Not the same thing, but you used to be able to buy similar principle here in an annuity.
I have a small annuity which pays a lifetime fixed rate of 6% which I rather regret not putting more into.

As for returns, well they were once good; 4-5%. The 10 year is now down around 1.6% and the 30 year is about 2.75%, moving out a bit, AAA corporates are around 3.25%.

I'd find it hard to get too excited about that.

I don't think advisors have much of a role in the preference.

No? Given the general lack of financial literacy across the Australian population, I think they would.
Perhaps it would be more relevant to say that it's Fund managers who have the influence, in that much compulsory Super in Australia seems to by default go into a Balanced option where the Fund managers have chosen to be overweight equities.

 

[drsmith]

It would be interesting to see the yields on CPI indexed bonds from the 80's and early 90's when inflation was much higher than it is now.

I'd bet that like conventional bonds, the yield then was much higher than it is now.

 

[prawn_86]

I'd find it hard to get too excited about that.

I think that sums up the Aussie attitude a lot to be honest. In all my financial dealings with Australians is they tend to be a lot more casuaul and adopt "she'll be right" attitude. Not saying that you do Julia, just in general as to why we probably dont have a lot of people invested in bonds

A bond like McLovin described is, in theory, the only way you can safely protect your savings from inflation, without being at the mercy of a financial istitution. You know what you will get from a gov bond, you wont have to complain each time your bank drops deposit rates, and the government is a lot less likely to go broke than a bank (especially a lot of the small American banks that went under over the last 5 years).

 

[Julia]

Prawn, is the general public actually able to buy government bonds? I was under the impression (perhaps quite incorrectly) that they're not available at a retail level.

Is there an inflation adjusted product such as McLovin describes?

When I said I'd find it hard to get excited, I was referring to the low interest rate, not the principle of bonds.

 

[craft]

Prawn, is the general public actually able to buy government bonds? I was under the impression (perhaps quite incorrectly) that they're not available at a retail level.

Is there an inflation adjusted product such as McLovin describes?

When I said I'd find it hard to get excited, I was referring to the low interest rate, not the principle of bonds.

Small Investor Bond Facility via the reserve bank.

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

 

[McLovin]

Prawn, is the general public actually able to buy government bonds? I was under the impression (perhaps quite incorrectly) that they're not available at a retail level.

Is there an inflation adjusted product such as McLovin describes?

Yes and yes. The RBA has a retail facility for buying small parcels of government securities. Per craft's post earlier in this thread there is a inflation adjusted bond available in Australia.

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

 

[Julia]

Thanks, prawn and McLovin. The yield is hardly tempting.

 

[sydboy007]

I find the fixed interest space in Australia nearly third world. We are so far behind the US and Europe in this.

As a retail investor it's VERY hard to buy quality corporate debt. I don't consider many of the hybrids listed on the ASX to be of decent quality - a lot can withhold interest payments, and many are no cumulative so any missed interest payment is lost to the investor. Quite a few have gone past their first call date and lost a lot of value, or become perpetual and lost a lot of value.

I wish there were more listed companies like AKY. They have bought into higher yielding corporate debt and offer a quite tasty 6% fully franked dividend. Only prob is they are small and rarely traded. For my SMSF it's a perfect fit.

I would argue Govts focus on borrowers because they are usually younger with families, and they tend to be more linked into pressure groups that Govts take notice of.