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AFR: Rate cut yield trap fear for nervous savers

Another cash rate cut could set a trap for yield-starved savers seeking better returns on their capital than those those on offer from banks, real estate and most balanced funds, according to fund managers.Savers and investors chasing higher dividends to offset falling income could drive up the price of income stocks, pushing down stock yields, or chase special dividends and overpay for additional yield, they warn.

Savings and lending rates are being slashed as lenders anticipate the Reserve Bank will cut cash rates from a record low 1.5 per cent at Tuesday’s meeting.

Fund managers are warning about traps as shadow banks match recent mortgage cuts by the big four and mutuals and slash their rates by up to 70 basis points, pushing lending rates to new record lows.

Good news for property buyers is creating fears for savers and those on fixed income, such as the nation’s 3.8 million retirees, as interest rates on savings and bonus savings accounts range from nil to promotional rates of 75 basis points, which is less than half the rate of inflation.

Top rates for one-year term accounts with a minimum of $25,000 range from about 1.3 per cent to 2.3 per cent, according to Canstar, which monitors rates and fees.

Returns on term deposits and products linked to bank bill rates are also likely to continue falling, according to Don Hamson, managing director of Plato Investment Management, which has more than $1 billion under management.”Income securities or bank hybrids are priced at a margin to bank bill rates and we have already seen 90-day bank rates fall more than 60 basis points this year,” Mr Hamson said.

Read the full article in the Australian Financial Review.