Government guaranteed term deposits fall to new record low rates, raising the premium offered by banks even though both offer less than CPI inflation

Government guaranteed term deposits fall to new record low rates, raising the premium offered by banks even though both offer less than CPI inflation
Real returns have long vanished.
Image sourced from Shutterstock.com

Treasury, through its Debt Management Office, has cut -25 bps from all its Kiwi Bond terms.

The new rates are ...

Term Previous change New
from July 13, 2020 % pa   % pa
       
6 months 0.50 -0.25 0.25
1 year 0.50 -0.25 0.25
2 years 0.75 -0.25 0.50
4 years 0.75 -0.25 0.50

Kiwi Bonds represent the New Zealand benchmark risk-free and Government guaranteed interest rate.

As at March, 2020 the CPI inflation rates was 2.5%. The June CPI inflation rate is due to be released on Thursday, July 16, 2020 and is expected to come in at 1.6%*. (ANZ today says it expects 1.4%.)

As such we can calculate the premium bank term deposit rates offer for the added risk they carry because they have no taxpayer guarantee, and how that stacks up against inflation.

Term Kiwi Bonds
pa
Bank TD
avg
Bank TD 
after
17.5% tax
CPI
pa
After CPI
return
Premium over
Kiwi Bonds,
after tax
 
  % % % % % %
6 months 0.25 1.63 1.345 1.6 -0.26 +1.14
1 year 0.25 1.69 1.394 1.6 -0.21 +1.19
2 years 0.50 1.73 1.427 1.6 -0.17 +1.01
4 years 0.50 1.79 1.477 1.6 -0.12 +1.06

Even though most bank term deposit options now return less than inflation at least they return much more than the benchmark risk-free return as provided by Kiwi Bonds. The best premium is for the one year term ('best' being a relative term).

In fact, the current bank rates might actually look quite good in hind-sight. That is because officials are making slow but relentless progress towards bringing in a "Government Guarantee" for bank term deposits. That will come with a cost from the Government to banks, and will result in lower term deposit returns. The premium of bank TDs over Kiwi Bonds will tighten right up then. At least, that is the experience in every other country that has a taxpayer guarantee scheme in place.

Where Kiwi Bonds are now is where bank term deposit rates are headed when there is a deposit guarantee - because they become risk free.

Term deposit rates

Select chart tabs »

The '1 year %' chart will be drawn here.
Loading...
(bank averages)
The '30 days %' chart will be drawn here.
Loading...
(bank averages)
The '90 days %' chart will be drawn here.
Loading...
(bank averages)
The '6 months %' chart will be drawn here.
Loading...
(bank averages)
The '2 years %' chart will be drawn here.
Loading...
(bank averages)
The '3 years %' chart will be drawn here.
Loading...
(bank averages)
The '4 years %' chart will be drawn here.
Loading...
(bank averages)
The ' 5 years %' chart will be drawn here.
Loading...
(bank averages)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

24 Comments

25
up

The lower these rates go, the more people will save.
Lower rate tells us all that the risk of 'doing anything else with our money' isn't worth it. The risk/benefit profile is so weighed in favour of risk that it's not worth taking - otherwise, people would.
Now you can say, "But hang on. I can buy a rental property and return a positive income from that!" and that's right IF you ignore the capital risk embedded in the current price of any asset at the moment. - witness the 'value' of stock markets for instance.
So, when will be the 'right time' to get out and take a risk? When rates start to rise ( counterintuitively) and that looks like it's a long way off.
So - more risk is headed our way. And the last thing we need right now, quite frankly, is more risk.

Good counterintuitive thinking.

13
up

Correct falling interest rate / OCR by themselves are indicator of falling economy and not otherwise.

Government wants everyone to invest - come out of saving mode and invest in High Risk Investment and that too now when stock as well as housing price are not working on fundamental but QE and despite panademic are at all time high and this is a dangerous thinking as many who had saved in low risk and low return are been forced to take more risk as a result entering now at all time high, what if government is not able to sustain the ponzi and bubble burst many will lose their savings / retirement at risk - Dangerous time ahead so agree with BW to wait and watch unless have been in High Risk investments earlier and have made heaps and do not mind the loss from the profit.

World is entering into a dangerous unchartered territory and RESET When it happens will be.....

Government world over is riding on QE with no one having any idea, how to get off it - NO plan whatsoever and only plan is spring as much as and as long as it takes under the guise of panademic.

You can invest in yourself and your own business though..that's the safest return and the kind of risk you can measure, if you have the ability to take action and be truthful with yourself. If so, then the time to take a risk is now, or ideally, years ago.

Don’t agree with this, the lower the kiwi bond/bank term deposit rates go the more money I have been putting into dividend paying stocks. Plenty of safe dividend payers on the NZ stockmarket paying 5%+ dividends. Makes no sense for me to keep money in the bank earning essentially zero when I can get 4-5x the return from dividends instead.

Don’t agree with this, the lower the kiwi bond/bank term deposit rates go the more money I have been putting into dividend paying stocks. Plenty of safe dividend payers on the NZ stockmarket paying 5%+ dividends. Makes no sense for me to keep money in the bank earning essentially zero when I can get 4-5x the return from dividends instead.

NZ Dividend Fund is not getting much love at the moment.

I really doubt there are safe NZX stocks paying 5% dividends available right now. You must be taking risk for 5% at present, either dividends could be cancelled ,or you are paying too much for the stock. Look at the carnage so far, AIA AIR SKT FBU SKC MEL CEN ZEL. Right now investors are scouring the planet for 3% returns.

The nominal interest rate is a pointless measure, you have to consider the real rate of interest. To calculate the real rate of interest we need to calculate the change in index price of all consumables (CPI) today and in future: if you expect deflation, then the real rate of interest in NZ is quite high. If you expect inflation to be zero, then the interest rate implies very slow market and if you expect inflation, then the real rate of interest is already negative.

As i get closer to retirement age the goal posts keep on getting further away due to the low returns available in "safe" assets. I had wished to retire early and live on the income of my investments as I waited for super but now I realise I will need to save more capital to spend in retirement if I want a comfortable retirement. I certainly don't want to chase yield in the sharemarket given how overpriced all asset markets look.

So I think this will be being played out all around the work - from mid-50s on people are realising they have to save more so they spend that capital in retirement rather than rely on yield.

Obviously a fair chunk of savings still flows into the property market but gross yields in many markets in NZ are between 2.5-4.5%. After costs, tax and "effort" it is barely worth it from a straight out yield perspective. Capital gains can only be driven by further speculation. I wonder when the boomers will start selling up to fun retirement?

Why do a guarantee on bank deposits? Surely those who want such a product can already find it in the kiwi bonds?

The squeaky wheel gets oiled.

Good point.

following the conomy down

The 10 year bond is at 0.94% and way more liquid you just have to get past the brokerage rates. Interest.co has just had ANZ and Kiwibank economists on to tell us that there is zero chance that NZ's economy is going to recover enough for these rates are going up anytime soon and negative rates are only a matter of time. I think government bonds will likely deliver the highest and safest return for the next few years.

Has anyone got any advice on who has the cheapest brokerage rates for retail bond buying? ASB's at 0.7% seem a bit steep.

Its all a bit sad. Doubly so if the greens policy of a further 1% tax comes into being.

Even at 0.5% it wasn’t about the Investment return, it’s about capital preservation. I might baulk at paying the Government to hold my money if that happens though. Meanwhile buying more Gold and Rolexes.

Yes just a safe place to keep cash. Unless you have over a million, interest on deposits is now so close to nothing its really a non event.

The Covid enemy is invisible, so who would bet on winning a war on those odds.
Asymptomatic super spreader, simply by touching a lift button. NO close contact.
More pain to come.
And can border control ultimately protect our economy?
https://www.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=12347495

I am at a loss to understand why we have dodged the bullet (so far). There must have been asymptomatic spreaders here. Could it be our harsh sunlight, our relatively low density lifestyle, the fact we are very low users of public transport, don’t go to bars etc as much as many nations, personal responsibility, relatively healthy population? Saint Jacinda? I do think, by and large, our government response has been excellent, so I’m not suggesting it was totally luck rather than judgement.

I think it is pretty obvious luck is involved . The response has been RELATIVELY good - but still had / has wholes for the virus to exploit.
Our response ( especially the border part of it .. ) is / was quite similar to that in Victoria or NSW , including the failings.
Victoria is in deep trouble ; ourselves and NSW seem to be getting away with it - so far , although our recent low testing levels leave some room for doubt.

The biggest thing - we acted early when people were still scared enough to follow instructions, and then the "light at the end of the tunnel" effect kept people in line to see us through to the end.

The longer it takes to respond, the higher the peak number of cases and therefore the longer the tail. People get bored with lockdown and want to move on with life, so stop following the rules and Covid comes back with a vengeance. If our numbers had looked bad in weeks 3 or 4 of Level 4, exactly the same thing would have happened here.

Stop banks creating on demand deposits using working capital and guide credit into productive assets like Japan did 1947 to 1985. Germany has used credit guidance for most of it's existence. In fact comunnity banks take care of pretty much all business lending. Pity United building society isn't around.

Countdown offered me a healthy return of 5% if I went and spent and paid em a hundred dollars, plus, when buying their Aussie Tucker this week.

They forgot to mention I had to pay their overheads, workers, profit on goods and GST. to get the 5 dollar kick back.

They said it was an undercover deal, just me knew about it....(I wonder how many others fell for it)...cos I didn't.

Now you know...never trust the economy....it is rigged.

Understanding about Economics is a simple process, but not for simple folk.

Some might think this was a bargain, to put food on your table. Some may wonder why it smells of deceit.

Am I wrong....please advise.

A week ago I opened a savings account with 2% interest for the first 4 months with Macquarie Bank, 1.35 otherwise. NZ banks can't compete.

Your access to our unique content is free - always has been. But ad revenues are under pressure so we need your direct support.

Become a supporter

Thanks, I'm already a supporter.