Closely studying the inner workings of the global bond market is not everyone’s cup of tea.
‍
Ok... it’s really only our cup of tea.

Which is why we thought we’d share some rather shocking news about just how bad the interest rate is that your bank is paying you on your savings.

‍

Banks issue some bonds that are safer than your deposit

‍

In New Zealand, money deposited at the bank is generally considered senior ranking to all other unsecured lenders to the bank. That means, in the event of a bank failure, depositors sit very close to the top of the queue to get their money back.
‍
But what many people don’t know is that New Zealand’s biggest banks also issue bonds (i.e. borrow a different way) that are secured over some of the bank’s best assets. This gives the owners of these bonds added protection should anything go wrong at the bank.

It’s because of this, covered bonds as they are called are assigned the highest (AAA) credit rating of all. While a deposit at one of New Zealand’s “Big 4” banks carries the equivalent of an AA- rating.

‍

Earning more for less

‍

Now, you wouldn’t be alone in thinking that surely this extra safety must come at a cost. Which would mean the owner of a covered bond must therefore have to accept a lower rate of return for this added safety.
‍
Unfortunately, for New Zealand’s savers that’s only half true.
‍
Yes, covered bonds offer some of the lowest interest rates (or yields) of any bond on the planet. But when compared with banks currently paying an average of just 2.3% interest on their on-call savings accounts in New Zealand, covered bonds look outstanding value at around 4%.

‍

The snag is accessing these alternatives

‍

The trouble is most of us don’t have the time, money, knowledge or experience required to access savings alternatives like these. And, of course, the banks know this better than anyone. Which is exactly why they know they can get away with paying us such terrible interest rates on our savings.
‍
At least, that was until now.

‍

Sources:

Bloomberg and Reserve Bank of New Zealand https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/new-interest-bearing-call-savings-account-interest-rates
‍The covered bond in this example is the BNZ 0.625% 3 July 2025 maturity bond (ISIN: XS1850289171)

‍

There are additional differences between the two savings options highlighted in this article, including but not limited to liquidity, interest rate sensitivities, and currency considerations that have not been explored in this article.