Just when you thought they surely couldn't go lower ...

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

13th Jul 20, 11:08am by David Chaston

Real returns have long vanished.

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
	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

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Source: interest.co.nz

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24 Comments

by bw | 13th Jul 20, 11:26am 1594596362

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.

by J.C. | 13th Jul 20, 12:04pm 1594598665

Good counterintuitive thinking.

by stuart786786 | 13th Jul 20, 12:40pm 1594600816

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.

by Somebloke | 13th Jul 20, 1:20pm 1594603241

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.

by KBKIWI | 13th Jul 20, 1:56pm 1594605374

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.

by J.C. | 13th Jul 20, 3:13pm 1594609984

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

by Justa comment | 13th Jul 20, 3:28pm 1594610913

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.

by Believer1980 | 13th Jul 20, 2:51pm 1594608685

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.

by Ptolemy | 13th Jul 20, 4:51pm 1594615904

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?

by sadr001 | 13th Jul 20, 11:24am 1594596275

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

by HeavyG | 13th Jul 20, 11:29am 1594596541

The squeaky wheel gets oiled.

by Uninterested | 13th Jul 20, 12:18pm 1594599522

Good point.

by Andrewj | 13th Jul 20, 11:43am 1594597403

following the conomy down

by tim52 | 13th Jul 20, 11:51am 1594597903

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.

by Uninterested | 13th Jul 20, 12:21pm 1594599708

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

by Ex Expat | 13th Jul 20, 12:28pm 1594600135

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.

by Justa comment | 13th Jul 20, 12:53pm 1594601632

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.

by Alittlebit | 13th Jul 20, 1:32pm 1594603922

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=12347…

by Pietro | 13th Jul 20, 2:22pm 1594606963

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.

by paashaas | 13th Jul 20, 3:46pm 1594612003

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.

by junglejuice | 13th Jul 20, 4:10pm 1594613446

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.

by PonziKiwi | 13th Jul 20, 3:47pm 1594612025

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.

by Alter Ego | 13th Jul 20, 4:24pm 1594614287

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.

by maninavan | 13th Jul 20, 4:46pm 1594615614

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.