Baffling Savings Trend: 6-Month Deposits Outshine 1-Year Investments

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Why the interest rate inversion of banks and savings banks

There is an interest rate reversal in deposit products from banks and savings banks. It is common to apply a higher interest rate the longer the money is deposited, but recently, the deposit interest rate has moved contrary to market wisdom. As interest rate cuts were announced, the banking sector reduced the interest rate benefits of long-term deposits, and consumers also placed more emphasis on liquidity and showed a clear tendency to prefer short-term deposits or instant deposit/withdrawal products.

According to the Korea Federation of Savings Banks on the 4th, the average interest rate for term deposits in savings banks was 3.59% per year for 12 months and 3.07% per year for 24 months, depending on maturity. In many cases, the interest rate on deposits with a maturity of 6 months is higher than that of deposits with a maturity of 12 months or longer. For example, the 6-month maturity product interest rate for OBS Savings Bank’s ‘Internet Term Deposit’, which has the highest deposit interest rate, is 4.1% per annum, but for 12 months, it is 3.5% per annum. HB Savings Bank’s ‘Smart Term Deposit’ interest rate is 4% per year for 6 months, 3.5% per year for 12 months, and 3% per year for 24 months. As such, there are 23 savings bank deposit products with 6-month deposit interest rates higher than 12-month deposit rates.

A reversal in short-term and long-term interest rates was observed not only in savings banks but also in banks. According to the Korea Federation of Banks, NH Nonghyup Bank’s ‘NH All One e-Deposit’ and Sh Suhyup Bank’s ‘Hey Term Deposit’ have the highest basic interest rates among term deposits with a 12-month maturity, each announced at 3.42% per annum. In the case of NH All One e-deposit, the interest rate at 6-month maturity was 3.45% per annum, which is higher than 12-month maturity.

Last September, as the United States implemented a ‘big cut’ (lowering the base interest rate by 0.5 percentage points), monetary policy entered a phase of easing austerity. With the Bank of Korea starting to lower its base interest rate, there is a prevailing view that interest rates will fall in the future. For financial companies, in a situation where interest rates are falling, long-term high-interest products that require high interest payments for a promised period are more burdensome than short-term deposits. An official from a commercial bank said, “In the case of long-term deposit products, negative margins may occur after the base interest rate cut begins in earnest.”

In the case of savings banks, there is a tendency to increase short-term deposits of less than one year in order to spread out deposit maturity dates. After the Legoland incident in October 2022, savings banks significantly raised deposit interest rates to secure liquidity. The interest rate on deposits of less than 12 months was raised to prevent funds from being drained all at once as the deposit maturity period is focused on the end of the year.

There has also been a situation where parking accounts that allow quick deposits and withdrawals exceed the interest rates on deposits and savings. SC First Bank and Jeonbuk Bank operate parking accounts with the highest interest rates of 4% and 3.51% per year, respectively. The savings bank even launched a parking account that pays up to 8% annual interest (OK Savings Bank) according to the preferential interest rate. Although the requirements are strict, such as a limit on the application of high interest rates, interest rates are higher than deposits with a fixed period, although you can receive interest on a daily basis.

In the United States, the Federal Reserve System (Fed) has begun lowering the benchmark interest rate, but market interest rates are soaring again. As the likelihood of the election of Republican presidential candidate Donald Trump, who advocated fiscal expansion and tariff increases, grew, U.S. Treasury yields began to reflect this.

On the 1st (local time), the 10-year maturity U.S. Treasury bond interest rate closed at 4.38%, up 0.14 percentage points from the previous trading day. This is the highest level since last July, when market interest rates remained high due to concerns about prolonged high interest rates. The 10-year U.S. Treasury bond yield, which is the benchmark for long-term market interest rates, moves depending on the Fed’s base interest rate and long-term economic growth prospects. If the base interest rate is lowered or the growth outlook is poor, interest rates will also fall accordingly.

Jinho Jeong and Namjun Kim (jeong.jinho@joongang.co.kr)