Certificates of deposit have the “diversification” factor

The rising popularity of certificates of deposit for local authority investment is down to councils seeking to move away from bank deposits and because they significantly beat returns offered by the Debt Management Office, according to experts.

Investments held in CDs stood at £1.276bn at the end of 2014 – up from virtually nothing in 2010.

Figures released by the Office of National Statistics show that CD investments during the fourth quarter of last year was up 10.86% when compared to the third quarter and was the fourth consecutive quarterly rise.

Experts told Room151 that the rise of the instrument reflected the desire of councils to move away from bank deposits in the wake of the financial crisis.

David Green, client director at treasury adviser Arlingclose, said: “The move is to do with diversification away from the usual deposit taking banks, especially into foreign banks, some of whom only deal in sterling via CDs, not deposits.

“Their tradable nature is also useful, so you can invest for one year and get a better rate of interest, in the knowledge that you can sell it again if you unexpectedly need the cash in a few months’ time. So they are a useful alternative to keeping lots of cash on instant access just in case it’s needed.”

Alan Simkins, local authority dealer at investment firm King and Shaxson, said: “I think it is partly because soon after the crisis many local authorities were looking for a new way of managing their liquidity.

“They severely reduced lending lists and within the securities we offer, we could considerably enhance value by using treasury bills and CDs.”

He said that the rates offered by CDs beat that from the Debt Management Office (DMO), which plummeted after the crash, and from fixed deposits with banks.

“CDs add value because of increased liquidity, the same or better yield with existing counterparties as well as having access to names that don’t accept LA deposits,” he added.

Green pointed out that despite the huge spike in their use, CDs still make up a very small proportion of local authority investments.

David Whelan, managing director of treasury solutions at Capita Asset Services, said: “I think we need to keep this in perspective. CDs only relate to around 3% of deposits, so a relatively small amount.

“The reason for the pick-up could be that RBS were offering longer dated CDs, at the same time as not being particularly active in the deposit markets.

“So if clients wanted exposure (as with Standard Chartered) they may have looked to the CD route.”

The ONS figures also showed that deposits held in the (DMO) deposit facility were at the lowest since the third quarter of 2011, falling by 23.02% over the quarter to £0.963bn.