Following the GFC - the value of term deposits held by Australian investors reached record highs as investors redeemed money from more volatile investments to move into safe havens.
Some commentators have suggested that the recent rise in the Australian share market is as a result of money being withdrawn from term deposit and invested into the share market. We did not sense that this commentary was true - but can now confirm this with statistics.
Below is a graph showing the value of term deposits in Australia on the left hand graph. It is clear that the record value of term deposits has stabilised, but not materially decreased over the past 12-18 months, despite low interest rates and good returns from share and property markets.
The graph on the right hand side shows whether term deposits are increasing or decreasing (increasing if above 0 and decreasing if line is below 0)
Further downward pressure on term deposit rates seems likely given the lower refinancing costs in International funding markets, which means banks are again able to fund their loan books at a lower cost through Wholesale funding, rather than relying on term deposits. Now that Term Deposit rates generally have a "3" in front of them it will be interesting to see how investors react. Anecdotally, we believe we are at the beginning now of investors starting to rotate out of term deposits to obtain a higher rate of return.