The Australian Securities and Investments Commission’s chief Greg Medcraft has warned that investors hungry for yield are going to be attracted to riskier investments as Australia’s interest rates dip further.
Mr Medcraft made his warning this week on the risks of bonds with 'junk' status, which are being marketed in the US. His timing comes after the Reserve Bank reduced the cash rate to 2.75 per cent – the lowest in decades – and warned it was possibly not the bottom of the cycle.
Junk bonds in the US are offering around 7.5 per cent interest. While that is a huge margin on the wholesale rate, unsophisticated investors don’t see that. Instead, they see a rate that looks and feels like a bank return only a few years ago.
Pre-GFC investors fell for returns in the double digits, not to mention the promises of security for all manner of intricately structured products. That created a world of pain; one that we are still dealing with.
It is alarming Mr Medcraft thinks that just a few years after the GFC hit, and while we are still dealing with its aftermath, investors have not learned their lesson – believing they may still chase returns and not do their homework on risk.
I think he is showing some honesty about the investment community. There are some people who will never listen. The problem is they complain the loudest when things go wrong, and everyone looks at the regulator, as if it could have stopped them.