Cash is King, even if its returns are still lagging

Personal Finance / analysis

Term deposit rates are rising in the shadow of mortgage rates and inflation. We look at the broader landscape of these increases and assess where the higher offers are even if they aren't matching CPI

20th Mar 22, 7:00am by David Chaston

Inflation is here.

Economic expansion isn't. There was catchup in Q4-2021, but there's unlikely to be any more in Q1-2022 or Q2-2022.

For the time being, we have an expanding labour market, and rising wages. But will they last?

Some say a period of stagnation is about to descend. Others a recession. As ANZ's respected Sharon Zollner said last month (pg3):

All up, 2022 is shaping up to be a challenging year economically, and getting on top of super-charged inflation without an outright recession is looking increasingly difficult. But with CPI inflation heading well over 6% the RBNZ has no choice but keep right on hiking. And now global geopolitical developments threaten yet more imported inflation via energy markets. Buckle up.

If that happens, the meme will quickly develop "Cash is King". Defensive attitudes will develop.

Holding 'cash' isn't actually holding the folding stuff. It is really about prioritising your defensive position. Holding higher liquidity positions in case of a job loss, or some other unexpected event that could mean your income is constrained.

Household bank account balances are rising. They rose nearly +7% in the year to February according to RBNZ S40 data We have been salting it away in current account, accounts that pay no interest. These balances are up +25% in a year. At-call savings accounts are up more than +11% over the same time and these accounts pay minimal interest. Accounts that pay proper interest (term deposits) actually fell -5% from February 2021. But a turn is underway. Over the past four months term deposit balances grew at a +10% pa rate. We are finally shifting more cash resources into interest-earning accounts - although to be fair that is mainly from those at-call accounts. Believe it or not we hold 60% of our cash balances in no-interest current accounts or low-interest savings accounts. We can do better than that - that is just making bankers richer!

Credit stress might be currently very low, but that can change. In fact, it would change if a recession hit. A cascading impact would affect many. Perhaps it will start with a wave of SME's calling it quits. It is a real possibility - people have been stretched for a long time.

So what does an investor do to prepare? After all, building resilience in the face of a potentially tough turn in our economic fortunes seems sensible.

This time around, "buying houses" seems a very risky thing to do. There have been a building series of measures weighing against seeking out that traditional 'tax-free' solution. There is no doubt that the values of most rental dwellings are falling now, generating capital losses just when the tax shelters have been removed. The media reporting of 'rising house prices' is all about "medians" - the middle price. But when the lower and average end of the housing market fades, those left selling are the houses in Herne Bay, Remuera, Kandallah, and Fendalton. If the weight of sales goes to those neighbourhoods, of course 'median' prices will rise. But it is a false flag about what is really happening.

So houses are 'out' for a while. They are no longer an inflation hedge.

I don't know what is 'in', and I doubt anyone really does.

But that leaves holding your 'resilient asset' (your savings) close, and probably in a bank account for now, at least until the fogs of 'war' and 'recession' clears. So it is time to assess term deposit returns.

They have been rising, although not fast - and certainly nowhere near enough to weigh against inflation fully. But interest-bearing deposits do at least counter some of the inflationary impact. You are better off with that interest than without it.

Among the main banks, all offers are very similar. If anything stands out, it is not standing out for a good reason for savers - it is ASB's low one year offer.

You need to consider challenger banks for higher rates with an investment grade credit rating. And Rabobank does stand out with offers across their card terms that are notable higher than almost all rivals - all except for the very short term. Heartland's nine moth 2.25% rate is worth a mention too, although it matches Rabobank there.

These standouts offer a 15-25 bps advantage or more over the main banks in the popular shorter terms, then rising. For three years, the advantage is +55 bps

An easy way to work out how much extra you can earn by switching 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.

The latest headline rate offers are in this table after this past week's increases.

for a $25,000 deposit	Rating	3/4 mths	5 / 6 / 7 mths	8 - 11 mths	1 yr	18mth	2 yrs	3 yrs
Main banks
ANZ	AA-	1.20	1.85	2.10	2.40	2.60	2.70	3.00
	AA-	1.10	1.60	2.00	2.10	2.60	2.80	3.00
	AA-	1.20	1.80	2.00	2.40	2.50	2.70	3.00
Kiwibank	A	1.20	2.00	2.10	2.50		2.70	3.00
	AA-	1.20	1.90	2.10	2.50	2.60	2.70	3.00
Other banks
Co-operative Bank	BBB	0.80	1.75	2.00	2.40	2.45	2.60	3.05
	BBB	1.75	1.95	2.25	2.45	2.10	2.50	2.75
HSBC	AA-	0.95	1.40	1.60	2.10		2.35	2.70
ICBC	A	1.35	1.80	2.10	2.50	2.55	2.85	3.25
	A	1.25	2.05	2.25	2.65	2.75	3.10	3.55
	BBB	1.10	1.75	2.10	2.40	2.55	2.55	3.00
	A-	1.10	1.65	2.00	2.40	2.40	2.50	3.00

Term deposit rates

Select chart tabs

Source: interest.co.nz

Term deposit calculator

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69 Comments

by Chch Lass | 20th Mar 22, 7:24am 1647714286

Can you please show the dates on this calculator in the NZ convention. Day/Month/Year

by Uninterested | 20th Mar 22, 7:49am 1647715776

Posting 5 yr term deposits would be useful to me because I seldom use the lesser terms.

by rjn1 | 20th Mar 22, 9:37am 1647722242

https://www.interest.co.nz/saving/term-deposits-1-to-5-years

by linklater01 | 20th Mar 22, 9:54am 1647723276

Uninterested,

I am curious. Why would you use 5 years TDs when rates are rising?

I have all my 15 TDs on a max. of 1 year with most shorter. As rates rise, then I can take advantage of them quickly while you cannot.

I also want the flexibility to use some of the cash to selectively buy back into the stockmarket at some point-but not yet.

by Independent_Observer | 20th Mar 22, 10:16am 1647724616

Yes I'm using the same strategy for the cash I've got. Going long term would have worked the past 40 years where interest rates have been trending down.....now we might be in the reverse of that cycle...a whole lot of different thinking is required across the board when it comes to investment....but we have a few generations of people who only know one cycle...and that is the falling interest rate cycle.

Any silent generation, or the elders boomers might understand the rising interest rate cycle from the 1950-1970's/1980's. But anyone involved in markets from 1970s/1980's - now has only experienced falling interest rates so is at risk of confirmation/recency bias in how markets and investing work.

by HouseMouse | 20th Mar 22, 10:25am 1647725152

Me too

by fortunr | 20th Mar 22, 3:45pm 1647744335

Agree.

Stay short - interest rates will rise significantly and stay higher. This is a structural change and now, as the devastating results of the central banks' reckless ultra-loose monetary recent policies are getting more and more visible, the big interest rates normalization process has started and it is here to stay.

by rjn1 | 21st Mar 22, 6:44am 1647798289

Agreed. Best option at the moment is Kiwibank's 90 day notice saver at 1.75%. They allow you to break into that at any stage to enter a term deposit.

by chebbo | 20th Mar 22, 8:01am 1647716508

Cash is certainly king in a deflationary recession, as described by Irving Fisher. But then we are literally talking about "the folding stuff"; it'll be no good to you in a bank account.

I wonder if this has anything to do with the increase in physical cash hoarding we've seen lately.

by Zachary Smith | 20th Mar 22, 8:45am 1647719138

Why would a deflationary recession make your money no good to you in a bank account?

by chebbo | 20th Mar 22, 8:57am 1647719837

Because the banks won't be able to make good on it. That's why we have bank runs.

by Solid_Granite | 20th Mar 22, 9:17am 1647721054

Physical cash makes less sense today than in the past. People rely far more on electronic transfers than physical, that's why I don't think a bank run will occur.

But I do think banks are going to be in a bit of trouble later this year.

by chebbo | 20th Mar 22, 10:01am 1647723711

Bank runs were a national sport in many jurisdictions during the GFC. They can be both electronic and physical in nature.

by Zachary Smith | 20th Mar 22, 10:10am 1647724240

Was anyone particularly burned by them during the GFC? A bank run could result in funds being frozen for a time while things are sorted and emotions calm down.

by chebbo | 20th Mar 22, 10:29am 1647725360

Plenty of people were burned. Funds cannot just be "frozen" until people "calm down". If you ask for your money and the bank cannot give it to you, that bank is in default and risks bankruptcy. This is exactly what happened during the GFC.

by Zachary Smith | 20th Mar 22, 10:42am 1647726166

If people have their money in term deposits it is effectively frozen. There weren't any bank runs in NZ and no one was burned here as far as I am aware.

I just think the risk is overstated. Something to consider but not be overly fearful of going on what has happened in the past.

by chebbo | 20th Mar 22, 10:51am 1647726689

Which is why you're paid a higher rate of interest on term deposits, to compensate for that additional risk. But as the article quite clearly shows, that's not where most people are keeping their money.

Where you keep yours is up to you, but history is quite clear on the risks involved. You either learn from others' mistakes, or you risk repeating them yourself.

by Independent_Observer | 20th Mar 22, 10:57am 1647727042

Interestingly (to me)...is that the higher the risk of a bank defaulting has got, as its exposure to NZ mortgage market has got larger and the debt bubble bigger, the lower the return given to creditors such as savers/term deposit holders.

If the theory of risk/reward were real, then the bigger the NZ property bubble has become, then the higher risk the banks really are, and therefore the higher return that should be awarded to creditors of those institutions.

Yet the reverse is true....the bigger the housing bubble gets...the lower the reward is that is given to the creditors of those institutions, as if the risk has got lower the higher that house prices have become.

A very strange relationship that appears to be 180 out from the rules of risk and reward.

by Independent_Observer | 20th Mar 22, 10:59am 1647727191

And what will be stranger again now is that if inflation shows up and house prices fall to lower levels, then savers/creditors will be rewarded with higher returns, as the risk of debt default falls with lower house prices.

Risk is lower of default, but return to creditors is higher.

Strange times we live in.

by fortunr | 20th Mar 22, 3:50pm 1647744604

This is what happens when central banks meddle so much with the financial markets, preventing the natural price discovery processes, so to make them almost devoid of meaning,

by chebbo | 20th Mar 22, 11:27am 1647728859

Yes, you're right. The rules of risk and reward still apply, it's just that for the past 20 years we've been pretending that risk doesn't exist.

Sharon Zollner pointed this out a year ago stating, quite correctly, that:

“If you misprice something for a long time, people will demand the wrong amount of it. And I would say ‘risk’ has been mispriced deliberately for a very long time.”

We didn't solve anything in the wake of the GFC, we just decided to use unconventional monetary policy to try and convince everyone that risk doesn't exist anymore. Well, you can only fool the markets for so long, and the increase in interest rates we're seeing now can be largely attributed to people recognising that there's actually risk in the world again; and quite a lot of it.

by rjn1 | 21st Mar 22, 6:46am 1647798412

Have you not heard of the open bank resolution (OBR)? Freezing your money while the dust settles is exactly what they can and will do in NZ. This may result in a haircut, depending how said dust settles.

by Solid_Granite | 20th Mar 22, 10:16am 1647724610

Good point.

by Noncents | 20th Mar 22, 12:22pm 1647732120

Electronic is the big one. I can now move entire balances to another bank in seconds.

A modern bank run will be far more damanging and rapid than many expect.

by Eschaton | 21st Mar 22, 10:56am 1647813373

You can't, the bank controls that money.

by Zachary Smith | 20th Mar 22, 9:22am 1647721365

Extremely rare and unlikely.

by chebbo | 20th Mar 22, 9:59am 1647723576

I'm sure you've got a good memory, it's obviously just a short one.

by linklater01 | 21st Mar 22, 1:49pm 1647823782

chebbo,

But you must know that the government would step in and bring forward deposit guarantees-at whatever cost. Thats what the UK did when Northern Rock was in danger of going under in 2007.

by Ahuhyeah | 20th Mar 22, 9:45am 1647722702

Amoung other things the low interest rates drove the baby boomers, who are naturally cautious due to experiences in the 70s and 80s out of modest return term deposits into property and shares.

Given their stage in life they will flood back into term deposits as rates rise. The net position vs inflation doesn't play a major role for most.... it's just the number they see in interest income on the bank statement and the ability to draw it down easily that matters. Throw in a virus that scares them and the shift to deposits will be a wave.

That's how my family on both sides are seeing the situation anyway.

That demographic influence is too high not to push overall property and share markets around for at least the next couple of years I'd assume. It will be quite a rapid transition.

by Tee | 20th Mar 22, 8:53am 1647719615

No sir, despite predictions of lower house prices, housing is still in the mix. A good asset to hold in times of inflation.

by HouseMouse | 20th Mar 22, 12:08pm 1647731283

Investor says property market 'tanking':

https://www.stuff.co.nz/business/128090978/investor-says-property-marke…

by Zachary Smith | 20th Mar 22, 9:22am 1647721324

He says they are set to go down 20%. However if they went up more than 20% over the past year or two and then they go down 20% it doesn't seem to me to be too much of a problem. It's weird how house price falls, even of modest amounts, are so feared.

by Brock Landers | 20th Mar 22, 9:29am 1647721795

The poor people that listened to printer8, CWBW and the rest of the greedy specufestors last year will be put into negative equity by a drop of 20%.

All that scrimping and saving. Wiped out.

by HouseMouse | 20th Mar 22, 9:34am 1647722095

Exactly. Remembering a 20% drop wipes out a circa 25% gain.

There was an awful article in the Herald yesterday featuring a line up of property spruikers saying it's nothing to be worried about.

by Cheetahlegs66 | 20th Mar 22, 1:42pm 1647736965

Only if you sell.

Equities dropped 30% end-March 2020. Some sold and realised the loss, some held, some dumped cash in and rode the upswing.

Never be in a position where you are forced to sell. You choose the time.

by HouseMouse | 20th Mar 22, 9:29am 1647721770

This line is trotted out so much, and although it has a degree of truth to it, it's also full of holes.

by Averageman | 20th Mar 22, 9:31am 1647721898

Leverage works in reverse and can lead to banks requesting more equity, a margin call so to speak. Developers and speculators fear this as it requires something most leveraged don't have...

Equity.

by agnostium | 20th Mar 22, 10:37am 1647725840

20% is not a modest fall. If that's in nominal terms with rising inflation the fall is even worse. Also as someone else posted a 50% rise only requires a 33% fall for you to be back at square 1

by Fitzgerald | 20th Mar 22, 12:17pm 1647731867

A 20% fall over 2 years, if inflation is running at 7%, is a greater than 34% fall in real terms.

Which, as you say, would wipe out a previous 50% gain.

by Averageman | 20th Mar 22, 9:44am 1647722651

Not surprised. Let's face it, without cheap debt fueled gains, it's a very long way back prices justified by rental income. Cheap dirty credit is all but gone.

by agnostium | 20th Mar 22, 10:47am 1647726473

It also says auctions are still the way to go for some properties according to *checks notes* auctioneer and national auction manager

by HW2 | 20th Mar 22, 1:42pm 1647736967

He sold two of his properties last year after becoming convinced the market would fall, and says prices could tumble 10 per cent

The agent fees probably cost him 5 percent incl gst and advertising. So unless he needed the money, which he didn't then why bother selling. You probably cannot get back in the market due to tighter lending rules and anti investor sentiment from Rbnz

Mr investor, think First before Act! (Btw that is not a political slogan for the byelection)

by HW2 | 20th Mar 22, 12:09pm 1647731349

This post from Carlos seems to sum it up

by Carlos67 | 19th Mar 22, 10:12pm Correct I did not buy a shitbox in the arse end of Auckland.

by JimmyJames | 20th Mar 22, 9:55am 1647723320

Not when it has already been inflated and is valued in debt and the maintenance of debt is getting more expensive.

by Independent_Observer | 20th Mar 22, 10:03am 1647723831

But what we are experiencing is consumer price inflation.......the inflation in asset prices has already happened over the last 3-4 decades (after 3-4 decades of CPI disinflation) where property/stocks and bonds have all been real winners...what a time to be an investor...just buy something and wait for the Fed to lower the cost of capital/discount rates and watch the value of your assets go higher and higher without doing anything at all!

Now we might be in the reverse of that cycle where we go through years or decades of inflation....with high cost of credit/discount rates and in real terms (and perhaps nominal terms), falling asset prices until a point where fundaments like P/E and debt to income ratios are back inline with historical standards.

by Ian w | 20th Mar 22, 12:16pm 1647731818

Wise thinking.

by fortunr | 20th Mar 22, 3:54pm 1647744885

In the longer term, economic fundamentals like P/E and debt to income ratios always reassert themselves. This applies to all asset classes, housing included. Central banks can cheat alright, but only for so long.

by rjn1 | 21st Mar 22, 6:52am 1647798725

Exactly right. People seem to struggle with this important distinction. Inflation is definitely NOT supportive of asset prices.

by HouseMouse | 20th Mar 22, 8:58am 1647719881

Good article.

by HouseMouse | 20th Mar 22, 9:48am 1647722923

As I've said before, I sold my shares last October, and have put half the the proceeds into a term deposit. I'll watch the market and look to potentially buy more shares again later this year.

I also changed my Kiwisaver to a cash scheme. Again, I'll revert to a growth scheme at some stage.

by Tee | 20th Mar 22, 12:17pm 1647731874

Like you, I 've switched to NZ bank cash.

by Mountie | 21st Mar 22, 11:17am 1647814636

We received our SYD payout (compulsory takeover) recently. Considered keeping it as a TD. Just couldn't do it. Split it across four stocks; CEN, TPW, HGH and STO (ASX). Bought HGH last Monday. Up 10.5% 7 days later. Interested to know what other people did with their SYD payout if anyone is keen to share.

by finite | 20th Mar 22, 9:44am 1647722658

David, I think you should include "notice" accounts in these comparisons. Some banks have notice accounts with rates that exceed the equivalent TD.

by Audaxes | 20th Mar 22, 9:46am 1647722807

Repo eligible (RP) ultra short term government collateral must have more utility than the return on it.

The Fed Inadvertently Adds To Our Ironclad Collateral Case Which Does Seem To Have Already Included A ‘Collateral Day’ (or days)

First day of rate hikes and 4w bill yield settles TEN BPS less than RRP. Like hiking RRP back on June 17, all the Fed has done is further expose the collateral problem it doesn't know we have. And they think inflation will be our biggest problem.

by Audaxes | 20th Mar 22, 10:03am 1647723795

A full ten below RRP can only mean one thing.

Why would any profit-maximizing investor buy a 4-week Treasury bill at a price which yields only 0.20% when the same could just as easily and for the same zero risk “lend” their cash to the Federal Reserve paying 0.30% which just so happens to be collateralized by a US Treasury security? The only answer is that whomever is paying this hefty premium for the bill isn’t doing so for its investment characteristics.

Lest we forget: According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

Short term Treasury collateral is money without corporate risk.

by Independent_Observer | 20th Mar 22, 9:55am 1647723336

Fed needs to raise rates to 5% to avoid stagflation and recession

"I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than appears likely," wrote Summers.

While the Federal Reserve must prioritize price stability to sustain employment, Summers said the reality is that real short-term interest rates will have to hit 5% to stave off a recession — and markets currently think this number is "unimaginable."

by Independent_Observer | 20th Mar 22, 9:58am 1647723508

What will the global economy and markets look like if the Fed go as high as 5% cash rate to keep stagflation away?

Oddly I think in attempting to fight inflation by raising rates, the Fed will cause deflation, credit contraction and debt defaults. But if they don't, then economies are going to suffocate under rising inflation that will become politically unacceptable (if not already).

by Independent_Observer | 20th Mar 22, 10:09am 1647724181

Anyone else watching that we are seeing inverted yield curves again? Think its only the 2/10 that hasn't inverted but is very close. Recession within the next 12 months?

So much for a 7-10 year business cycle....perhaps given the extraordinary measures taken by central banks in 2020, you can reduce a full cycle into 2-3 years and to control it, it will require evermore insane monetary and fiscal policy.....I'm terrified about what central banks and governments are going to do if we do slip back into recession this year given the precedence set in 2020 which has destroyed the concept of risk (and return).

by fortunr | 20th Mar 22, 3:59pm 1647745199

I saw that too, and it is a bit of a worry for me too. I might well be optimistic, but so far this inversion seems quite moderate and local and it might also be caused by temporary factors such as the unexpectedly fast rise in shorter term rates. But it is definitely something to keep a close look at, that's for sure. If there is one thing I do not like, it is seeing yield curves inversion.

by Carlos67 | 20th Mar 22, 11:37am 1647729430

Still weird stuff from ASB. I got their 1 year rate at 2.3% last month and now its dropped to 2.1%. Their 18 month was 2.4% and now its gone to 2.6%. TD rates are very slow to rise at this point, I was going to hold off a bit to catch the obvious rises that are coming but it would have been zero interest for 2 or 3 months at this rate of change. The only upside is I expect current TD rates to have doubled in 12 months time.

by HouseMouse | 20th Mar 22, 11:59am 1647730787

So sounds like you are another who sees quite a bit of value in TD's, Carlos.

Especially, as you allude to, in 6-12 months time.

by Carlos67 | 20th Mar 22, 6:50pm 1647755402

Yep they are pretty stress free and TD's will have a number starting with a 4 in 12 months time.

by Flying high | 20th Mar 22, 9:11pm 1647763868

Just one thing Carlos, a certain commenter has expressed an interest in doing property development and probably needs capital. May be reading too much into it, i hope so

by Carlos67 | 21st Mar 22, 6:16am 1647796565

Yes I think so and what your reading appears to be mainly pictures and I'm not talking about the property press.

by Yeah right | 20th Mar 22, 3:04pm 1647741849

It was a good move to ease back on growth equities last year, but I'd consider getting back on that horse sooner rather than later, particularly for companies with pricing power.Yields are moving up, through reduced prices, but particularly, increased earnings.

Shares reflect market sentiment instantaneously, whereas residential property takes years to reflect a negative market outlook.

by Doggog | 21st Mar 22, 7:09am 1647799742

MANIPULATION OF COLLECTIVE CONSCIOUSNESS THROUGH FEAR

by Eschaton | 21st Mar 22, 10:52am 1647813122

Bankers are getting richer regardless of what the public does, or does not do.

by Mr Ed | 21st Mar 22, 1:05pm 1647821145

NZ's biggest gang

by Russ H | 23rd Mar 22, 11:29am 1647988186

Is Kiwibank the safest bank in NZ ???

We sold our main rental property Dec 2021 - expecting a drop... got that wrong by about a yr and missed out in big increases (doh)

Anyway we are mg free now and had a good size chunk of spare cash left over.

I have been buying a fixed amount of shares each week (buying the avg) in a selection of funds from InvestNow (which seems a pretty good way to go even if we are down 8% to end of Feb)

Anyway about term deposits. We have also just put some $ into 4 TD's with Kiwibank -

30 days / 60 days / 90 days / 1yr - So something matures each quarter... which we will reinvest for a yr... hopefully at a higher rate.

This plan will allow us to always have money coming free each quarter

We moved our TD's from SBS ( BBB cr rating ) to Kiwibank (A+ rating )

My theory being: KB are owned by the govt (well at the moment) - So should be the safest place to put your $$$. Surely Cindy wouldn't let KB go bust !?!?!

Interested in what others think about that ^