# Unusually inverted yield curve for time deposits

I found out the following time deposit rates of a bank:

I understand the meanings behind inverted yield curves. However, the rates seem very unusual to me: The 18-month rate is far lower than the 15-month rate, which causes the amount of interest received at maturity of a 18-month time deposit is less than that of 15-month time deposit. For example, if I put \$10 into a 15-month time deposit, I can receive \$0.63 interest at maturity, but only \$0.61 if I choose the 18-month tenor.

Is there a reason the bank offers such rate, and is there a reason a customer chooses the 18-month tenor instead of the 15-month tenor, then put the money into a normal saving account or withdraw it (so more interest will be earned)?

This is in United States, right?

You are correct, that's an inverted yield curve. However, the inversion is so strong it may be an error. Or it may be possible that the particular bank has a huge money need in the short term (and is therefore offering lots of interest), but no shortage of money in the long term.

Generally, shorter deposits have lower interest rates than longer deposits. This is because for an investor, longer deposits have a risk: you lock the interest rate, meaning that there's always a risk that interest rate goes up, inflation goes up, and your deposit still has the fixed rate. It's like paying for insurance, except you as an investor are the insurance company and you get paid by the bank.

However, prior to expected recession it may be possible the yield curve is inverted. This happens when investors expect that the recession causes central banks to reduce interest rates due to lessened inflation pressure. So shorter deposits in this case have to be competitive with market rates today, but longer deposits have to compete only with the expectation that interest rates are being reduced.

We can calculate based on 15-month rate and 18-month rate the average instantaneous forward rate between 15 and 18 months.

A 15-month deposit will yield

``````1.05^(15/12) = 1.0628858
``````

A 18-month deposit will yield

``````1.0408^(18/12) = 1.0618201
``````

So apparently the bank is expecting interest rate 15 months from now is negative. The instantaneous forward rate is then

``````(1.0618201/1.0628858)^(3/12) = 0.99975 = 1-0.00025
``````

So the bank is expecting a -0.025% interest rate between 15 months from now and 18 months from now.

This is almost certainly a peculiarity in the financing structure of the bank, or an error. As far as I know, nobody sane is expecting negative rates 15 months from now.

• The bank operates in Hong Kong, if that matters. Nov 19, 2022 at 12:56

This may be a matter of rates not all having been adjusted at the same time for some reason known only to the bank. Or it may be a printing error. Best advice I can give is to ask that bank why they advertise it that way.