Bourse Securities Ltd
With interest rates at a historically low level, local investors are left with the challenge of obtaining relatively acceptable returns on their TT$ investments. The downward trajectory of local interest rates in recent years is attributable to numerous factors. In this article, we will review the recent trends of TT$ instrument rates, before discussing the interest rate outlook and ways the local investors can seek to maximise their returns.
A downward spiral
The current low interest rate environment is supported by a myriad of factors. In general, interest rates are primarily dependent on several economic factors, including the level of economic activity, inflation rate and liquidity levels within the financial sector, among others. The state of the economy is normally reflected in interest rates levels. For instance, during times of boom, interest rates are high and conversely, during times of downturns, rates fall. This relationship holds true for local interest rates, which have trended downward in recent times. For instance, following the 2008 global economic downturn, T&T's economic recovery remained tepid, as our energy-dependent economy experienced sub-par growth in response to falling commodity demand and prices. Consequently, the Central Bank embarked on an accommodative monetary stance by reducing the benchmark rate, the repo rate, on several occasions. As such, the repo rate fell by 5.75 per cent to 3.00 per cent in June 2012 from 8.75 per cent in January 2009.
The Central Bank's accommodative monetary stance and the deliberate lowering of the repo rate aided in fostering the low interest rate environment which has characterised the local economy over the past three years. The downward spiral of short-term rates is illustrated in Figure 1. Ninety-one-day Treasury yields declined to 0.10 per cent in April 2012 from 7.12 per cent in January 2009. Similarly, during the same period, the weighted average of commercial banks deposit rates fell to 0.20 per cent from 2.13 per cent. Another factor which contributed to depressed interest rate conditions in recent times was the build-up of excess liquidity within the local financial sector to unprecedented levels. Substantial net fiscal injections and relative scarcity of TT$ investment vehicles contributed to the increase in deposits at commercial banks and the resulting increase in financial system liquidity. However, following commercial banks' excess reserves peaking at $6.5 billion in March 2012, the Central Bank embarked on several liquidity absorption measures, such as the voluntary placement of $1.5 billion in a one-year deposit offered to commercial banks. These measures experienced some success in "mopping up" excess liquidity within the sector, as commercial banks excess reserves fell to $2.2 billion and 90-day Treasury yields inched up to 0.50 per cent in June 2012.
How low can it go?
The persistent downward trend of local interest rates has led many investors to wonder how much lower rates can go. As we have previously discussed, interest rates are largely dependent on the state of the local economy. The bleak economic outlook and muted growth rate of 1.0 per cent forecasted by the Central Bank signals that the monetary authority may maintain its accommodative monetary stance. As such, local investors should be prepared to see the returns on their local investments remaining flat, with a downward bias, in the second half of 2012.
What can you do?
With commercial bank deposit rates averaging around 0.20 per cent, the local investor may be wondering what investment avenues are available to maximise their return. For those who are interested in short-term investments, money market mutual funds can be considered. These funds are relatively safe and liquid instruments and can provide a superior return to commercial bank deposits. The yields on TT$ money market instruments currently range from 1.0 per cent to 2.00 per cent. It should be noted that the distribution rates of these funds are not fixed and can be lowered or raised at the fund's discretion.
Another short-term instrument available on the local market is repurchase agreements (repos). Repos can earn similar or superior returns than money market funds and have the added advantage of a earning a fixed rate of return for a specified period of time. Repos are fully secured investment products that can be used by investors to diversify their portfolio. Repos are backed by high quality assets and are thus, relatively safer than fixed deposits which are unsecured investments. Additionally at present, they offer relatively more attractive rates than TT$ fixed deposits, which are generally yielding less than 1.00 per cent. Alternatively, TT$ investors can also consider extending their investment horizons into the medium term (5 to 7 years) to benefit from higher yields. As Figure 2 illustrates, ten-year government of T&T paper is currently yielding 4.91 per cent.
However, the scarcity of TT$ bonds continues to plague the local market, with the first half of 2012 void of any public bond auctions, coming off the back of only three public bond issues in 2011.
Conclusion
Investors who wish to remain predominantly invested in TT$ instruments, can consider including money market funds and other fixed-rate instruments such as repos and bonds in their portfolio. Bearing in mind, that local public bond auctions are few and far between, investors should remain vigilant and take advantage of opportunities in the local market as they arise.
For more information on the investment options available, speak to a qualified investment advisor, such as Bourse, before making your investment decision.
