The bank deposit tax went AWOL in the budget and that isn't the only good news for savers. Term deposit rates might be a lost cause but even then there's some hope.
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And the yield on each new issue of bank convertible preference shares – hybrids – is higher than the last.
Best of all, higher paying, top-line corporate bonds are for the first time available to mum and dad investors in affordable parcels just like shares.
Labor's bank deposit levy was supposed to start next January, and appeared to be backed by Joe Hockey to the point where it was included in pre-budget speculation.
So much for my one and only budget tip. Thanks, Joe.
Technically, the 0.05 per cent tax is still on the budget books but without a start date. Turns out the fly in the ointment was the Murray inquiry recommending against it, which isn't what it was supposed to say.
The other good news from the front is that the yields on government bonds have been creeping up.
What help is that? Well you can rely on bonds to tell you where rates are going. Sure, the Reserve Bank will have a big say in that but there's no mistaking the trend. Remember, bond yields collapsed long before term deposit rates did and will be the first to head up. Not that I'm saying it's an excuse to party or anything yet – you'll just have to be patient.
For mostly the wrong reasons, bank hybrids are stunningly popular with DIY super funds. Never mind they're glorified shares, and not even that really because their yields are lower. The difference is hybrids pay interest, which varies like a home loan, instead of what would be a higher dividend from proper shares.
Both are franked but hybrids are sneaky. Unlike shares where the franking credit is a nice bonus, it's built into the hybrid rate.
Take Bendigo & Adelaide Bank's new offering with a yield of about 6.25 per cent including franking but is really 4.8 per cent, the rest coming after you file your tax return. Yet the bank's shares, which you'll one day finish up with, are yielding 5.3 per cent or 7.7 per cent after franking.
That's right, you don't get your money back when a hybrid matures (which many don't). Instead you're force-fed the equivalent number of shares, with a modest bonus, in the mother stock.
Getting your hands on bonds issued by some of Australia's biggest companies, previously the preserve of the big funds, is a breakthrough for the likes of us. Being higher up the default food chain, corporate bonds are safer than hybrids and come with a fixed interest coupon, not a floating rate.
Until now you had to go to a fixed interest dealer who would have a minimum subscription from $50,000 upwards. But the new exchange-traded bonds or XTBs have no minimum except what your broker sets. There's a list of them at xtbs.com.au.
I daresay they won't make you rich, but a five-year corporate bond will pay more than the equivalent term deposit.
For example, Lend Lease's five-year bonds (ASX code YTMLL1) are yielding about 3.75 per cent after deducting the one-off, upfront 0.4 per cent fee. But that's if you hang on until maturity and so get back less than you paid because they're trading above their $100 face value.
A like-for-like comparison with hybrids is the running yield which puts the XTBs in a much better light. It's calculated the same way as a dividend yield. That's to say it's the return based on what you have to pay to get it.
In the case of the Lend Lease bond which costs $110 a pop, the coupon is a fixed 6 per cent a year, making the running yield a still respectable 5.3 per cent. And unlike a hybrid, there's no waiting into the next financial year for full payment.
But like shares, bailing out sooner can come with a cost sometimes or a benefit at others. As it happens the Lend Lease bonds returned 13.2 per cent over the past year including the capital gain. If you have $50,000 to invest you're probably better off buying a corporate bond through a fixed interest dealer such as FIIG where the Lend Lease bond yield after brokerage is 0.3 per cent higher.
But bear in mind, bond prices move closer to their face value the closer you get to maturity. In the end you need to decide whether the higher return from a good corporate bond is worth losing the government guarantee on term deposits.
I suspect a bit of both is the answer.
