With term deposit rates rising, where is the best rate?

Co-founder of the Switzer Report
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Although the Reserve Bank is firmly “on hold” when it comes to the cash rate – which has been stuck at 1.5% for 21 consecutive meetings of the RBA Board – term deposit rates are inching higher and are set to go higher. That’s the good news for investors.

The bad news for share investors is that the banks are facing higher short-term borrowing costs and their net interest margin is under pressure. While many of the smaller banks are passing the higher costs on to their borrowers (for example, AMP increased their owner-occupied home loan rate last week by eight basis points and their investor rate by 17 basis points, while Macquarie increased their rates by six basis points and 10 basis points respectively), with the Royal Commission in full swing, the major banks are reluctant to follow suit. Higher short-term rates also mean that listed companies are paying more on their debt.

Why have short-term rates gone up? It is hard to be definitive about the cause. Some argue that due to the strength of the US dollar, President Trump’s company tax cuts and the US Treasury issuing more treasury bills, there is a global movement of funds back into US dollars. Many US companies are also reported to be re-patriating funds back into the USA. The blowout of spreads in Australia and other countries is largely following what is occurring in the USA.

The next two charts demonstrate the point. The first chart shows the spread between 90-day LIBOR (a benchmark rate for 90 day US funds) and the US overnight cash rate over the last 12 months. The spread between the two has moved from around 15bp to a high of 60bp in March and back down to the current 38 basis points (90 day funds are 0.38% higher than the overnight cash rate).

US 90 Day LIBOR vs Cash Rate Spread

Source: Bloomberg

Over that same time period, the spread between the Australian 90-day bank bill and the overnight cash rate has widened from around 20 basis points to the current 52 basis points (90-day bank bill rate of 2.02%, cash rate of 1.5%).

Australian 90 Day Bank Bill vs Cash Rate Spread

Source: Bloomberg

Another argument advanced for the spread blow-out locally is that the total pool of retail deposits has peaked and banks are being forced to compete aggressively in the wholesale/institutional markets for funds. There is pressure on the savings ratio and total bank loans are growing faster than total bank deposits.

The key point about the movement in the spread is that banks use the 90-day bank bill rate for most of their funding. While the RBA cash rate gets the headlines, mortgages and many other assets are priced relative to the 90-day bank bill rate. Unless the bank chooses to increase their mortgage rates, margins get squeezed.

As wholesale funding becomes more expensive, banks compete more aggressively in the retail market. This translates into higher term deposit rates for renewals and specials to attract new investors. There has been a tick up in rates already and further small increases can be expected.

The best term deposit rates

Listed below are the latest term deposit rates on offer for the popular terms of three months, six months, one year, three years and five years. Rates are current as at 13 July and are based on a deposit of $50,000 with interest paid on maturity or annually for terms of three or five years.

Rates are shown for the four major banks and 13 regional/significant/online other banks. The major banks typically pay lower rates than the online banks and the regional banks.

Each of the major banks has a “special” or “headline” rate (highlighted in purple). Sometimes, these are only available for a few days, so check online to see what is available. The pick of these on Friday were CBA’s 2.50% for 5 months and ANZ’s 2.60% for 9 months.

National Australia Bank owned UBank has the best three month rate at 2.60% and six month rate at 2.75%. while ING Direct has the best 12 month rate at 2.85%. For three years, ME Bank is offering 3%, while RaboDirect wins hands down in the five-year category at 3.50%. “Best” rates are highlighted in green.

ING Direct, RaboDirect and UBank also reward loyalty by paying an additional 0.10% pa when an investor rolls over the full amount of a term deposit to a new deposit term.

And while it can be a hassle to change banks or open a new bank account, if you want that extra 0.25%, be prepared to shop around. Don’t be put off by security concerns because with the effective Commonwealth Government guarantee on deposits of $250,000 on a per client per financial institution basis through the Financial Claims Scheme, Bank A is as good as Bank B up to $250,000.

Rates as at 13 July 2018 for deposits of $50,000 and upwards. Interest paid on maturity, or annually for 3 and 5 year terms. Advance notice (31 day) products selected when offered. Teachers Mutual is “customer” rate.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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