Treasury bills now offer nearly twice what banks pay for term deposits 

The rise in Treasury bill rates in the recent few weeks was so intense that at the current yields investors in bonds gets nearly double of what they could get from a bank for a similar tenor term deposit, the data showed. 

The Treasury bills yields recorded their fourth consecutive week of steeper increase this week with the benchmark 1-year bill yield touching 12 percent after it added 85 basis points at the weekly primary bill auctions held on Wednesday. 

There was some increased interest in the longest tenor bill this week as the subscriptions increased to a little under Rs.1.2 billion, but still bond investors preferred the shortest tenor and the short term yield curve that remains inverted as the 3-month bill yield rose to 12.10 percent, adding 75 basis points. 

The Public Debt Department issued Rs.56.5 billion in bills, but Rs.71.1 billion worth subscriptions were received under the 3-month tenor, and the Central Bank accepted Rs.54.8 billion under the same tenor.

Meanwhile, parsing of the published term deposit rates of commercial banks showed that banks’ deposit rates are far from re-pricing their deposits in line with the sharp increase in the bond yields and the lending rates. 

This was a matter, which was also observed and pointed out by the Monetary Board. In its March 4 monetary policy statement, it took note of the substantial lag effect in adjusting the deposit rates in line with the rise in the other market interest rates. 

For instance, the 1-year term deposit rate of commercial banks still hovers between 6.50 percent to 9.00 percent, with the potential to go up to 10.0 percent in extremely rare instances. 
Even banks encourage depositors with big-ticket size amounts into 3-month Treasury bills due to its attractive yields. Unless banks raise their deposit rates quickly, they could lose an opportunity to raise their deposit portfolio to government securities. 

With record negative money market liquidity levels continuing for months now, the banks will have to offer attractive rates for their deposits. 

However, if the banking sector turns more conservative in their loan book growths, they probably will not raise their deposit rates at the pace they are raising lending rates. 

According to sector analysts, it is going to be more of a margin play than a volume play going forward, as banks are turning more cautious in new lending due to heightened concerns over their asset quality with the fallout from rising interest rates.