Term deposits versus fixed interest funds: liquidity and yield differences are changing
For investors considering term deposits as an alternative to a fixed interest fund, developments in bank funding and regulation are changing the potential returns and liquidity of these instruments.
– Returns: Since the onset of the GFC, banks have been keen to offer competitive interest rates to attract investors into retail term deposits. This is because regulators consider them to be a ‘sticky’ form of bank funding; less susceptible than short-term wholesale funding that can dry up in times of banking stress. However, now that banks have built up their holdings of retail term deposits, and their lending activities are subdued, they are no longer bidding aggressively for this type of funding. Indeed, over the past 6 months, bank term deposit rates have not kept up with the full extent of increases in the Official Cash Rate (OCR). As a result, the gap between 6 month retail deposit rates and the wholesale 90 day bank bill rate is the narrowest in 5 years.
– Liquidity: Although banks have anticipated regulators by holding ‘sticky’ retail term deposits, regulators are now getting tougher by enforcing that term deposits are truly a ‘sticky’ form of funding. In the past, some customers have been able to rely on strength of their relationship with their bank to be able to break term deposits without cost. Upcoming global regulations out of the Basel Committee are prompting some Australasian banks to formally notify customers of notice requirements to break term deposits and of the penalty rates that apply for early withdrawals. The implication is that investors will no longer be able to treat term deposits as liquid instruments, such as on-call cash or a fixed interest fund with daily liquidity. When considering the appropriate investment, each individual needs to take into account their own objectives and circumstances. Some may suit term deposits; others may suit a fixed interest fund. In either case, it is important to recognise that regulatory and market developments are changing the relative returns and liquidity of term deposits.
20 August 2014 | ContactUs@harbourasset.co.nz +64 4 460 8306