The spread between returns from Treasury bills and earnings from bank fixed deposit accounts has reached its widest margin in nearly seven years as interest rates on government securities rise faster than what lenders are offering to their cash-rich customers.
An analysis shows the spread between the 91-day Treasury bill and the average deposit rate was posted at 2.35 percentage points in April, marking the highest rate since February 2016.
The average return from the 91-day Treasury bill stood at 10.04 percent in April against a 7.69 percent return from fixed deposit accounts in the same month.
The widening spread between the two returns implies an investor would reap more from tying up funds in government securities as opposed to locking cash in fixed deposit accounts.
Commercial banks are subsequently expected to come under pressure in attracting and retaining the high value deposits amid the rising return from the Treasury instruments.
Banks rely largely on high-value fixed deposits to mobilise funds for onward lending to other customers. They also hold short-term deposits that are held in current and savings accounts and which attract a lower return since customers can withdraw them at any time.
The spread between the T-bill and fixed deposit returns is expected to widen in subsequent months as interest rates on government paper continue to steadily increase.
Last week, for instance, yields on all three short-dated government papers - the 91-day, 182-day and 364-day T-bills - crossed the 12 percent mark, mirroring the agitation by investors for a greater risk-adjusted return.
The return from the 91-day T-bill reached 12.014 percent in last week’s auction from 11.904 percent previously, joining the yield on the 182- and 364-day papers in breaching the 12 percent mark at 12.199 and 12.250 percent respectively.
According to analysts, the return on government paper will continue to soar from a combination of factors, including inflation and increased domestic financing requirements for the government.
“Over the past month alone, average 91, 182 and 364-day T-bill rates have increased by 100, 72 and 41 basis points in that order, showing the impact of CBR revisions, investor expectations, high inflation and increased fiscal deficit financing,” analysts at Sterling Capital noted.
“The Monetary Policy Committee’s decision to raise the CBR from 9.5 percent to 10.5 percent will work to drive T-bill rates further upward as investors accommodate this rate hike in future auction bids.”
Rising interest rates on the 91-day paper have worked to reverse a scenario where commercial bank fixed deposit accounts paid a higher premium as recently as September 2020.
Treasury bills have historically delivered a greater return than fixed deposit accounts in periods defined by high-interest rates.
In October 2015, for instance, the interest spread between the pair of assets was at its widest since 2005, at 14.11 points when the 91-day paper paid a return of 21.65 percent.
