Term deposit (TD) rates are likely to drop below 5 per cent in the wake of the Reserve Bank of Australia (RBA) cutting the cash rate by 50 basis points, that could in turn spark a move out of these instruments as they reach maturity, Tria Partners said.
"Our sense is that investors and financial planners are not yet moving en masse, but that the shift is now on as TDs come to maturity," Tria Partners managing partner Andrew Baker said.
The rate cut by the RBA to 3.75 per cent last week put pressure on the banks to drop the one year term deposit rate below 5 per cent, a psychological barrier for many investors, Baker said.
"Anything with a 4 in front of it may have a psychological impact on investors and act as a catalyst for the movement of deposits towards high yield growth assets," Baker said.
Yet, banks would try to continue the 5 per cent rate as they are keen to keep the deposits for funding purposes.
Baker estimates that about $180 billion of retail wealth management money is invested in cash and term deposits, of which $45 - 90 billion is likely to be reinvested in growth assets, including shares, when rates drop too much.
"At face value, it's pretty hard to see how 5 per cent can be maintained," he said.
"But it's not the normal course of events, and banks will probably try to maintain 5 per cent for as long as they can."
But this will prove increasingly difficult, Baker said.
"It looks like official rates are going to keep heading lower," Baker said.
At the same time, income focused investments have become more attractive.
"Yields on higher yielding equities, REITs, and other growth assets become harder to ignore (this is a classic mechanism by which bear markets come to an end)," he said.
Meanwhile, the demand for TDs might see a spike, as investors are trying to secure the current 5 per cent rates before they disappear, Baker said.
