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Bank accounts vs. Govt bonds in light of the Guarantee

Discussion in 'Business, Investment and Economics' started by sinner, Jan 11, 2012.

  1. sinner

    sinner

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    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".
     
  2. Tyler Durden

    Tyler Durden

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

    sinner

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    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/
     
  4. McLovin

    McLovin

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    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).
     
  5. Julia

    Julia In Memoriam

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    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.
     
  6. McLovin

    McLovin

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    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"?

    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.
     
  7. sinner

    sinner

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    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.

    Selection_002.png

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

    McLovin

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    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.
     
  9. sinner

    sinner

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    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.

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

    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.
     
  10. sinner

    sinner

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    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).
     
  11. McLovin

    McLovin

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    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.


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

    sinner

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    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?
     
  13. McLovin

    McLovin

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    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.
     
  14. sinner

    sinner

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    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
     
  15. McLovin

    McLovin

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    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.
     
  16. sinner

    sinner

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    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.
     
  17. Julia

    Julia In Memoriam

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    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.

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

    Wysiwyg Everyone wants money

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    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.
     
  19. McLovin

    McLovin

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    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.
     
  20. sinner

    sinner

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    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

    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.

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