With the spotlight on lower term deposit yields we thought it worth focusing on their liquidity . Essentially, term deposits can be broken before maturity with the issuing bank. There is no broad market determining the price, just a single bank and their deposit pricing systems. The following is a real life example as at 11th May, 2015:
- Term deposit with major bank yielding 3.3% (annualised) maturing on the 21st September 2015 – $138,877
- Early redemption price offered by bank at 15th May 2015 – $140,595
Let’s say the investor had bought a tradeable bond on the 21st September 2014@ 3.30% yield and we know that yields have fallen on the bond to 2.70% today . There is deep liquidity in the bond and the investor can sell at a yield of 2.70% – $142,063. In summary, the bank is happy to redeem this term deposit at an effective yield of 3.30% because it can reissue at 2.60% into today’s market. Whereas the astute bond investor has picked up a capital gain from being invested in a liquid bond (i.e an additional $ 1,468). The other issue is that many term deposits now require 31 days notice to redeem early. So you may miss out on alternative opportunities whilst waiting for your money. Clearly term deposits issued by Approved Deposit Taking Institutions under $250,000 are government guaranteed for now and many investors lack the knowledge and sophistication to buy and sell bonds, but liquidity and capital gains should be an important consideration for income investors.
