The term deposit market's wild ride ahead

National Australia Bank is trying to lead Australian term deposit rates to lower levels. If the NAB thrust is followed by the others it will be a significant blow to the returns of self-managed superannuation funds. But lower term deposit rates also carry a risk to banks – depositors may switch their money from term deposits to other securities.

The NAB thrust downwards has led the Canstar group to claim that some of the major banks are passing on the full rate cut to their term depositors but holding back the full reduction from mortgage holders.

Not surprisingly, I have had ABC Radio on the line.

I did not make a list of term deposit rates before the latest official interest rate reduction. However, two months ago NAB, via its UBank subsidiary, were offering 5.31 per cent for 12 months. They have been edging it down but have now slashed the rate to 4.81 per cent – a drop of half a per cent.

You will remember that UBS was offering to fund its clients to take up UBank deposits using borrowed overseas money (NAB eyeballs a term deposits raid, August 14). The clients would get an effective yield of 12.4 per cent at no risk.

NAB itself has now slashed its one-year rate to 4.55 per cent compared to 4.51 per cent offered by the Commonwealth for 11 months and 4.5 per cent by Westpac. All these rates are down about 2.5 per cent from the levels of a few weeks back so the banks have matched or exceeded the Reserve Bank rate cut in shorter term deposits.

However, in longer-term rates there is a different story. NAB has taken the plunge and taken its five-year rate below the magical 5 per cent that is so important to self-managed funds.

NAB's five-year rate is down to 4.8 per cent – a bigger fall than the official rate decline. But Westpac and CBA are still offering 5.2 per cent for five years, which represents no change on the rate offered a week ago.

The Australian banks are trying to take advantage of the huge superannuation shift to self managed funds (Popping fears of a property bubble, October 8) and are aiming to attract term deposits from this enormous savings pool. So far the banks have been very successful but the recent lower rates have prompted a big swing by self-managed funds to hybrid securities and this would have been a factor in CBA and Westpac holding their five-year rate above 5 per cent.

Australian term deposit rates are now more expensive than overseas wholesale borrowing. However, today's wholesale overseas borrowing rates are above what the banks locked in three years ago. These old low cost overseas loans are now maturing and are being replaced either by higher cost wholesale overseas money or even higher cost local term deposits.

On the other hand the banks have vast lumps of one-year local term deposits maturing which are being replaced at much lower rates.

As I have previously pointed out official rates have to come down to lessen the effect of a double dose of the Dutch disease (RBA readies for a double Dutch smack, October 2).

We are going to see more adventures in the term deposit market.