[2008-03-07]  Short-Term Deposit Rates Crash
Short-term deposit rates have crashed to below 20 percent on extreme surplus positions on the money market.

Inversely, the free capital has secured refuge on the stock market, which has broken through psychological boundaries in recent days.


On February 29, the money market closed up $525 trillion rising from January 30 levels of around $50 trillion. This pushed to the floor rates on deposits on the short-end of the market. Several asset managers have not been quoting rates on 7-day and 14-day paper, and the few ones doing so were giving rates as low as 10 percent.

Instruments of tenor 30 days or 60-days attracted interest rates of between 20 percent and 30 percent. Ninety-day paper is being quoted around 50 percent. On Tuesday, however, some fund managers were quoting rates of up to 100 percent per annum, on a flat scale for all deposits of 3 months or below. Still, the surplus conditions on the money market had not deteriorated. On the day, the market was estimated to have ended $439 trillion long having opened up $433 trillion. "The surplus condition looks nowhere near the end and against this backdrop we forecast equities to continue with the upward rally," said a dealer with Interfin Securities.

Short-term interest rates have fallen from as high as 400 percent early February, and from over 700 percent at the height of the liquidity crisis in January. Then, the banking sector faced a severe cash crunch with money market liquidity positions tightening to levels as deep as $180 trillion.

Dealers said firmer Government expenditure had driven the market into surplus. Government has so far injected US$18.6 million under Bacossi, a Reserve Bank of Zimbabwe sponsored fund targeted at raising industrial production. Aspef, another Government-backed fund meant to energise agricultural productivity has also released several billions of dollars into the market.

More cash has also been pumped through gold purchases, whose price was recently increased to $100 million per gramme Both Bacossi and Aspef will be withdrawn in June, says the central bank, which feels companies can now support their own systems after a year of cheap funding.

Many an investor are not willing to move into asset bearing instruments, whose yields have rapidly fallen below inflation. Zimbabwe's annual inflation rose to more than 100 000 percent January from 66 000 percent in December. The month-on-month rate declined to 120 percent from 240 percent at year-end in 2007. Now, most investors have found wisdom in investing money on the stock market.

Over the last half-decade, stock market returns have religiously trashed inflation, and continue to do so even to this day. Since January 2008, the main industrial index has gained more than 360 percent and minings over 250 percent. And as long as money market yields continue running below inflation, investors will find equities a worthy hedge against inflation.

The equities rally is thus largely expected to persist in the short-term, analysts said, with occasional profit taking along the way.


Source: Copyright © 2008 The Herald.