T/ Bill rates

dineshdp · 1 T/ Bill rates Mon Jun 08, 2020 3:34 pm

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T/Bill rates are keep declining. Will it have a positive impact on equity market?
https://m.facebook.com/story.php?story_fbid=125987689120309&id=113139593738452

Antonym · 2 Re: T/ Bill rates Mon Jun 08, 2020 5:28 pm

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dineshdp wrote:T/Bill rates are keep declining. Will it have a positive impact on equity market?
https://m.facebook.com/story.php?story_fbid=125987689120309&id=113139593738452

All other things being constant, declining interest rates are positive for equity markets for 2 main reasons:
(i) Companies that borrow have to pay less interest (and therefore earn more profit).
(ii) On the supply side, investors tend to move their funds from lower-yielding fixed income instruments to the equity market in search of better returns. This additional demand pushes up share prices.

dineshdp · 3 Re: T/ Bill rates Mon Jun 08, 2020 5:47 pm

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Thats true.

wallstreetguy · 4 Re: T/ Bill rates Tue Jun 09, 2020 9:46 am

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Bad news for banks as their margins shrink further.

dineshdp · 5 Re: T/ Bill rates Tue Jun 09, 2020 9:55 am

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Bt still they can keep their spread as their borrowing rates will also come down.

Antonym · 6 Re: T/ Bill rates Tue Jun 09, 2020 10:04 am

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wallstreetguy wrote:Bad news for banks as their margins shrink further.

Yes: Banks make most of their profits from the difference between lending and borrowing rates (called 'spread').

In a declining interest rate scenario, margins shrink because the banks have to continue paying the higher interest on older deposits until they mature - whereas lending rates reduce sooner, since customers tend to renegotiate the rates at which they borrow.

dineshdp · 7 Re: T/ Bill rates Tue Jun 09, 2020 11:13 am

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Antonym wrote:

wallstreetguy wrote:Bad news for banks as their margins shrink further.

Yes: Banks make most of their profits from the difference between lending and borrowing rates (called 'spread').

In a declining interest rate scenario, margins shrink because the banks have to continue paying the higher interest on older deposits until they mature - whereas lending rates reduce sooner, since customers tend to renegotiate the rates at which they borrow.

True but still they can earn high margin on their long term investments. Nevertheless banks and Finance companies have to maintain their ceiling rates and margin limits as per the CBSL guidelines.