Term deposit rates are rising, but not as fast as either wholesale rates or home loan rates

The recent appearance of a 4% rate for a one year term deposit, from SBS Bank, is indicative of the fast-moving rate landscape for savers.

Although you can now get a 4% or higher rate for terms of four or five year from a number of banks, including the majors, no one else has matched that level for a one year rate - yet. And it has to be said "yet" because it is surely coming and relatively soon.

Mortgage rates are rising, pushed up by wholesale interest rates. And those wholesale bond rates are rising quickly now. On Monday they will get a good kick along from international bond market activity at the end of last week. The secondary market has opened locally with the NZGB 10-year breaching 4%, for the first time since 2014.

That same secondary market has trades for the NZGB two-year up at 3.59%, also a notable rise from the Friday level.

Wholesale swap rates are probably moving up from the same forces, or will do when trading gets active and serious later on Monday.

Retail term deposit rates don't yet reflect these recent moves up. They have some catching up to do.

But there is another factor at play - the demand for funding.

If home loan demand is falling, and it probably is, it can only really fall to the level of rollovers. And that floor sets what banks need for funding. They can get it from either wholesale or retail sources. Wholesale can be a preference because that type of funding comes with a decent duration, usually five years or longer. We are seeing an uptick in bank activity in wholesale markets recently, and there will be more this week.

Unfortunately for bank treasurers, wholesale funding comes from investors who are yield-savvy. And recently they have raised their requirements for yield. And if bond investors are going to subscribe, they can only get that yield if they hold to maturity. In a rising interest rate market, higher rates depress the price of the bond after it is issued.

As we have previously noted, we are in a rare situation where retail term deposit offers are now lower than benchmark swap rates. We haven't had this situation since 2008.

Bank treasurers will be eyeing that discount. If money is less expensive from term deposit savers, they will target it despite the reluctance of most savers to offer it for any term longer than a year. In the mix with longer term wholesale funding, money from retail savers enables then to build margin.

But this is only worthwhile so long as there is loan demand.

An easy way to work out how much extra you can earn is to use our full function deposit calculator. We have included it at the foot of this article. That will not only give you an after-tax result, you can tweak it for the added benefits of Term PIEs as well. It is better you have that extra interest than the bank (and especially if you are in the 39% tax bracket - PIEs are taxes at 28% flat).

The latest headline rate offers are in this table after the recent increases.

for a $25,000 deposit June 13, 2022	Rating	3/4 mths	5 / 6 / 7 mths	8 - 11 mths	1 yr	18mth	2 yrs	3 yrs
Main banks
ANZ	AA-	1.65	2.50	2.70	3.15	3.30	3.60	3.80
	AA-	1.65	2.50	2.70	3.15	3.30	3.60	3.80
	AA-	1.50	2.30	2.45	3.00	3.30	3.60	3.80
	A	1.65	2.50	2.65	3.15		3.65	3.80
	AA-	1.60	2.40	2.60	3.15	3.30	3.60	3.80
Other banks
China Constr. Bank	A	1.90	2.95	3.15	3.55	3.65	3.90	4.20
Co-operative Bank	BBB	1.20	2.30	2.45	3.00	3.30	3.55	3.80
Heartland Bank	BBB	1.75	3.00	3.00	3.60	3.60	3.60	3.80
HSBC	AA-	1.40	2.20	2.40	2.85		3.40	3.60
ICBC	A	1.85	2.70	3.10	3.60	3.60	3.75	3.95
	A	1.85	2.90	3.10	3.50	3.60	3.85	4.15
	BBB	1.50	2.35	2.50	4.00	3.30	3.65	3.80
	A-	1.65	2.50	2.80	3.15	3.40	3.60	3.80