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Term deposits and bonds are key components of the fixed income category, offering investors potential stability and regular income. Understanding their distinct characteristics can help you make more informed investment decisions in today’s changing interest rate environment.
A term deposit is a fixed amount of money invested for a specified period at a guaranteed interest rate with an Authorised Deposit-taking Institution (ADI) recognised by APRA. These include:
Key Features:
A bond represents a debt security where an investor lends money to a borrower (government, bank, insurer, or corporation) for a fixed period.
Key Features:
Feature | Term Deposits | Bonds |
Return Certainty | Guaranteed fixed rate | Locked-in returns for longer timeframes |
Reinvestment Risk | Higher (especially in changing rate environments) | Lower (with longer-term bonds) |
Issuer Diversity | Limited to ADIs | Broad universe of issuers with varying risk profiles |
Capital Growth Potential | None | Possible with high-quality fixed-rate bonds during economic downturns |
Liquidity | Limited (31-day notice period) | High for quality issues in secondary markets |
Pricing | Each financial institution prices their own deposits | Priced by participants in the bond market |
Government Guarantee | Up to $250,000 | Varies by issuer (government bonds have sovereign backing) |
Market Context (March 2025)
The interest rate environment remains dynamic following the significant hiking cycle of 2022-2023. Since 1995, hiking cycles have occurred in some concentrated time periods, but the overall trend has been downward, making current investment timing considerations particularly important.
Portfolio Considerations
From a diversification perspective, bonds may offer significant advantages, including:
While term deposits offer simplicity and government guarantees, bonds typically provide greater diversification of benefits and potential for capital growth. Historically, term deposits have struggled to match the long-term performance of quality fixed-rate bonds. For comprehensive portfolio construction, bonds should be seriously considered to achieve optimal diversification and income objectives.
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The information contained in this article is believed to be reliable as at March 2025 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. ©2025 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB does not guarantee the accuracy or reliability of any information in this article which is stated or provided by a third party. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. You may be exposed to investment risk, including loss of income and principal invested.
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