Value emerging in term deposit rates

After several years of exceptionally low Term Deposit (TD) rates, forecasts for higher RBA Cash Rates combined with growing bank funding requirements and wholesale market funding conditions has led to more attractive TD rates emerging over recent weeks and months. TD rates of up to 3.35% for two years are now available from some banks.

For the cash or lower risk component of portfolios it is now more attractive to move out along the yield curve for a portion of funds. While the market expects the cash rate to rise over the next 1-2yrs (and we would agree) there is already now a material increase in rates priced into the yield curve.

In the tables below we provide examples of rates across a number of banks and terms available via the IAM Deposit Platform as well as some example portfolios that spread maturity and issuer risk.

The steepness of the yield curve (for example, the difference between a 2yr TD rate of 3.50% and 6-month rate of 1.00%) provides investors with incentive to invest for longer term while in effect being insulated from future expected rate increases. While it is reasonable to expect the RBA to lift rates over the next 1-2 years, current market rates (and by extension many bank TD rates) already imply significant RBA rate increases.

Apart from the steepness of the yield curve the other driver of more attractive TD rates are bank funding requirements and wholesale funding conditions. RBA facilities – including the COVID-response Term Funding Facility and previous existing (but phasing out) Committed Liquidity Facility provided banks with cheap term funding. Government stimulus payments to business and households provided the banking system with deposits, which combined with RBA Quantitative Easing, flooded the banking system with cheap liquidity. As the economy emerges from COVID these support mechanisms are slowing or reversing and banks are more reliant on traditional funding sources (i.e. deposits and wholesale funding). In wholesale funding markets (senior unsecured bank bonds and mortgage securitisation) we have seen spreads double from the low point in 2021. This makes deposit funding more compelling for banks and has (and will) increase competition for deposits which is driving the better rates for depositors that we are seeing in the market.

For investors in bank bonds, the same drivers are evident. The steeper yield curve and wider spreads are creating better value in the 3-5yr part of the curve for fixed rate investors looking for stable income. This is true in senior unsecured debt as well as bank “Tier-2” subordinated debt.

When considering term deposits and fixed rate bank bonds worth remembering a few differences:

• Term Deposits benefit from the Government’s Financial Claim Scheme (FCS) which may provide $250,000 of Government guarantee in the case of bank failure. Senior (and subordinated) bank bonds do not and in the case of subordinated bonds investors may in extreme circumstances be converted to equity at less than face value.
• Term Deposits may not be broken for the agreed investment term or only breakable with a penalty. Bank bonds (fixed or floating) can be sold prior to maturity although there is no certainty of future liquidity and in both cases can be subject to market price volatility. For investors who may require liquidity Negotiable Certificates of Deposit (NCD) rather than TD may be more appropriate; however, these instruments which can be sold before maturity are not covered by the FCS. IAM is able to offer NCD format deposits from some banks although rates may differ from TDs.

IAM has access to competitive TD rates for a range of terms from over 50 ADI’s that can be accessed from a single investment platform. IAMs online cash management platform streamlines the process of investing in term deposits, at call accounts and NCD’s, saving time and helping to earn a higher yield.

Portfolio 1 Term Deposits

Portfolio 2 Term Deposits & NCDs

Interest rates as at 2 May 2022.

Simon Maidment has over 30 years’ experience in financial markets and bank treasury including senior roles at UBS Investment Bank as Head of Fixed Income, and Commonwealth Bank of Australia as Deputy Treasurer where he was responsible for the banks global funding and liquidity. Simon is available to provide specialist advice to Income Asset Management clients looking to manage liquidity and cash flow risks.

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