Discontinuous Yield Curves

I think that the equity markets have topped out and have cashed out all my equity and equity mutual fund holdings, and am thus sitting on a pile of cash, which I’m looking to invest in debt. Happened to check out the websites of a few banks where I hold accounts and what caught my eye was the discontinuity in the yield curves.

Here is HDFC Bank:

1 year 1 day – 1 year 15 days Below Rs.15 Lacs 6.00% 6.50% May 18, 2009
1 year 16 days Below Rs.15 Lacs 6.50% 7.00% August 03, 2009
1 year 17 days – 2 years Below Rs.15 Lacs 6.00% 6.50% May 18, 2009
2 years 1 day – 2 years 15 days Below Rs.15 Lacs 6.00% 6.50% May 18, 2009
2 years 16 days Below Rs.15 Lacs 7.00% 7.50% August 03, 2009
2 years 17 days – 3 years Below Rs.15 Lacs 6.00% 6.50% May 18, 2009
3 years 1 day – 5 years Below Rs.15 Lacs 6.00% 6.50% May 18, 2009

Notice the discontinuity? About how for a couple of randomly chosen dates the interest rates suddenly shoot up?

Similarly with ICICI Bank:

391 days to 589 days 6.25 6.25
590 days 6.25 6.25
591 days to less than 2 years 6.25 6.25
2 years to 789 days 7.00 7.00
790 days 7.00 7.00
791days to 989 days 7.00 7.00
990 days 7.25 7.25
991 days to less than 3 years 7.00 7.00

Again same story. On certain “magical” days, interest rates shoot up. The degree of increase in rates here is much less dramatic, though. Nevertheless this is extremely interesting, and I wonder why. I remember last year going to Karnataka Bank and asking for a 1 year deposit, and they asked me to make one for 400 days saying that I’ll get 0.5% per annum better for that.

This morning I went to State Bank of India and found that they don’t offer these special rates. I had a friend check at another nationalized bank and found that they too don’t offer special rates. Wonder why the private banks are offering it, though. Why it makes that big a difference to them that the deposit is for 990 days as against 991 or 889. Or is it some way to prevent early closure?

In other news, SBI is offering teaser rates for home and auto loans. Their ads have been there all over the airwaves for the last few weeks. They offer 8% for first year, 8.5% for second and third years and then what they call as “normal rates” after that. If SBI is getting into teaser rates, god only save Indian finance.

4 thoughts on “Discontinuous Yield Curves”

  1. I think that its a small-no matter how small-feel good factor the customers get, on the 990th day,(and the 990th day is a fair amount of time-neither too early,nor too late-after the opening of an account.. Something like a small gift, the bank doesn’t lose too much, we don’t gain too much, and yet there is a teeny veeny bit of satisfaction among the customers.. And ultimately, they gain, coz frm the 991st day its back to 7%, n’ after a substantial period,it is inc. to 7.5%, and apparently its working..yes, I think it does prevent early closure,as mentioned.

  2. Regarding the SBI teaser rates, no doubt it is a disaster in the making.

    However, the public sector banks have been giving out loans to farmers who have no hope of paying them back for decades due to govt pressure and then the govt basically absorbs the losses. So in that sense nothing new – now instead of only farmers, some city people will also get a chance to benefit..

  3. Also might have to do with the fact that Recurring Deposits are not available for tenure of 390 days, 590 days 790 days and 990 days. So banks might need have specific funding requirements on those particular dates. Begs the question as to why these particular dates and why the RDs are not available on these dates. There’s nothing in particular in the Interbank money market about these tenors that I know of.

  4. In most cases, private sector bank rates are 1-1.5% lower than the public sector banks for the same tenure. These rates may be to give some semblance. Also, not sure if these rates have a rider about early cashing out options ( The detail may be in the fine print, even if they have, the fact that the days are mentioned as tenure, it gives an impression to the depositor otherwise)

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