A low overnight deposit rate prompted one company’s treasury to push back and ask for a higher rate. The bank doubled it.
Corporates that want to keep some cash in bank deposits as the Fed hikes interest rates but don’t like the rates they’re being offered should consider an inspirational example described by one assistant treasurer who said her treasury team told some of its banks, in essence, “Your rates aren’t good enough.”
- The AT discussed the approach during a recent NeuGroup session on positioning cash portfolios for a changing rate environment sponsored by Capital Advisors Group.
- She said bank deposits are an important part of the company’s relationships with banks in its revolving credit facility, especially those where deposits are the only share of wallet they receive.
A great rate. After one bank initially offered an overnight rate of 1.6%, the AT said treasury let them know they were not in alignment with rates being offered by other banks. And the bank understood the corporate would pull its deposits if the rate didn’t rise. “We would have moved it to another bank—you have to be willing to make a change,” she said. In response, the bank offered to double the rate to 3.25%, which peers agreed was a great result.
- How great? Lance Pan, director of research and investment strategy at Capital Advisors, said that today, “under normal circumstances, banks can borrow at 3.05% and earn at 3.15% at no risk. It makes sense for banks to offer deposit rates at any point up to 3.05%, but not 3.25%.”
- He added, “unless they lend out all the money they borrow, 3.25% would represent a negative spread for the banks (earns at 3.15%, pays at 3.25%). If a customer can get a rate at the top of the range, the bank must be making a concession to retain their business.”
- The AT said that in her experience, while some banks will take the initiative and raise rates in response to Fed hikes, others will not. With those, “unless you ask, you’re not going to get.”
- And of course, asking does not guarantee a satisfactory increase. One of the other banks in the corporate’s revolver did not raise its overnight rate to an acceptable level and treasury is withdrawing deposits from that bank, the AT said.
Context. The Fed in September raised the target range for the federal funds rate to 3% to 3.25%, hiking rates by 75 basis points for the third consecutive time. But banks—many flush with deposits—have not passed along most of those increases to depositors.
- In fact, for every 100 basis points the Fed increases rates, Capital Advisors estimates, the average bank only passes along 15 to 20 basis points in higher deposit rates.
- Capital Advisors notes that FDIC data shows the national average money rate was still stuck at just 0.18% as of Sept. 19. “This is astounding,” Mr. Pan said.
Alternatives to bank deposits. Relatively low rates on bank deposits have some corporates considering moving money to higher-yielding alternatives. One Capital Advisors executive said that rising rates on commercial paper (CP) and other short-term fixed-income investments including treasuries mean the “opportunity cost” of staying in bank deposits is rising.
- Indeed, one cash investment manager at the session said, “It’s getting harder and harder to justify significant balances at the bank.” His company is considering prime money market funds (MMFs).
- Other members are sticking with government MMFs, including the AT who asked banks for higher rates on deposits. Her company, which has reduced its total cash holdings, including deposits, may consider CP and short-term treasuries, among other investments.
- “We’re facing dramatically higher borrowing rates,” she said. Partially offsetting greater interest expense with better rates on deposits is “only one leg of the stool.”
