Fixed Interest October 2008

October 15, 2008

Fixed Interest Opportunities

The turmoil in the global financial markets has seen governments around the world taking action to ensure the stability of the banking system. Most central banks have been slashing interest rates in an attempt to stimulate the economy, and we are now seeing governments’ guaranteeing bank deposits.

Yields are falling, and look set to fall further by the end of next week. Some are predicting a one percent lowering of the Official Cash Rate to 6.5 percent on October 23. Most economists are predicting the Official Cash Rate will be below 5 percent in 2009. Those of us with money at call or on short-term deposit at the bank are going to be receiving significantly less for our money from now on.

The Government guarantee on deposits includes finance companies and building societies. They had to be included to avoid people withdrawing their money en masse and shifting it to the banks. So we now have a bizarre situation where you can invest with Marac or South Canterbury Finance at 10 percent, and enjoy the same security as a Government Bond paying 5.75 percent. I can’t see the finance companies holding these rates for long, so my advice is to take advantage while you can. Marac, South Canterbury, UDC and Allied Nationwide have all applied to the Government to be covered under the scheme, and we are in touch with them on a daily basis as this develops.

CAUTION

  • The fundamentals should not be thrown out the window
  • Bank deposits should still form some part of a fixed-interest portfolio
  • Choose companies that were sound before the Government guarantee
  • Retain funds at call for emergencies and to take advantage of future opportunities
  • Don’t invest too much money with any one company

For those of you averse to the finance company sector (even with a Government guarantee) there are still some good secondary market opportunities available. The ANZ perpetual bond paying 9.66% until April 2013 is currently selling at $102.50 per 100.

Please call the office and discuss further if you want to take advantage of these opportunities.

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