Deposits pricey at the bottom of the rate cycle

One-year term deposit yields are currently paying up to three per cent over the benchmark cash rate.

While there have been some tentative signs of securitisation opening up for the second tier and of wholesale funding getting slightly easier for the majors, the deposit market is still the main game for all institutions.

And prices for on balance-sheet money a destined to be high for a long time yet, a couple of advisory firms on the fixed interest sector say.

"Even though banks have access to wholesale funding markets, they are big institutions so when they need money they need a lot of it and it can be easier for them to go to the term deposit market," says Andrew Murray, director of Curve Securities.

"I have heard in the last month that NAB and Westpac in particular have been offering rates higher than the credit unions.

"There are some very attractive one-year rates around now for one-year securities paying around five and half per cent from credit unions, and you would have to say that is very attractive."

Some institutions are paying more than 300 basis points over the cash rate for big one-year term deposits, says Jim Stening, managing director of FIIG Securities.

"Prior to the rate rise today the best rates we were seeing, late last week, were in excess of six per cent from a regional bank.

"For a one-year yield, banks are paying up to and more than two per cent over the benchmark rate and that's consistent with the wider level of margin we've seen over the whole GFC," says Stening.

"It is something that is here for quite a while. Things have to be funded on balance sheet now."

Likewise, Murray doesn't see an easing in the intense competition for the deposit dollar any time soon.

"I don't see any easing until the securities market frees up for the second tier and credit unions. ME and Heritage have issued some RMBS but there isn't much of that happening at the moment.

"Term deposits are still the main game for banks and the second tier. Now everyone is competing for the same pot of money."