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In December 2018, the 90-day bank bill rate was trading at 2.10% and the Bank hybrid security market was issuing securities at an additional margin of 4%, for a total yield of around 6.10%.

Since then the cash rate has fallen only 0.50%, but the 90-day bank bill rate has fallen by 0.90% to 1.20%. The additional margin payable by the banks has fallen from 4% to 2.80%.

The total yield for hybrid securities that mature in 2026 now only yield around 4%, a fall of 2% over the last 3 months.

With $1m supposably required to expect to live in a comfortable retirement, a bank deposit of under 2% will only produce an income of about $1,500 per month. Bank Hybrids, which are much higher up the risk scale (they rank just above equity holders), the return of 4% will bring in $3,300. Doesn’t sound like the prospect of a safe comfortable retirement is attainable.

This will mean that investors will be forced to chase riskier assets, hence the recent rally in the share-market. We are still 200 points off the 6851 Index high on 1st November 2007, but with an index fund like STW yielding 6.40% with franking credits, there is a good chance the high can be reached.

But with interest rates heading for zero, it doesn’t naturally mean asset prices will keep rising. Countries like Germany have had negative interest rates for years, with the current 5 year Government bond rate at minus 0.70% (yes, you need to pay the Government for them to borrow from you). With interest rates as low as this, the German DAX index has gone sideways July 12 months ago. Low interest rates may just mean a slowing economy.