Investment Alternatives with Falling Interest Rates, Where You Earn More

2025-08-31 08:45:00, Ekonomi CNA

Lower interest rates by central banks are bringing lower returns from most financial savings and investment products.

The mosaic of investment alternatives seems to be becoming more complex. Since last year, central banks have turned to lowering interest rates. Lower interest rates affect the reduction of returns from investing in deposits or debt financial instruments.

Yields and interest rates from financial investment or savings products have followed a downward trend last year and the first part of this year.

In addition to the Central Bank's movements, the reduction in interest rates in the financial market has also been influenced by the liquidity situation of the financial market, further increased by the entry of non-resident investors into the government securities market.

On the other hand, the government's demand for financing in the domestic financial market has been declining.

Adding to the reduction in risk premiums, from the decline in public debt and the improvement in the sovereign debt rating, this situation has caused the benefits from investing in the classic financial instruments offered by the Albanian market to decline, both in Lek and Euro.

The decline in interest rates is temporarily favoring improved returns, mainly from investment funds, which value their assets at fair market value. During this period, investment funds in Lek are offering satisfactory rates of return.

However, given that they generally invest assets in government bonds and bills, over longer periods, the fund's returns approximate the average return from the portfolio of securities in which they have invested.

In periods when interest rates are lower, stock markets generally tend to gain ground.

However, in recent months, stock markets have not had a very good time either, affected by the high uncertainty created by the Trump administration's aggressive policy regarding trade tariffs.

One instrument that is increasingly being used is private placement bonds. These instruments offer higher returns compared to deposits, especially in the Euro currency, but generally also compared to government securities of the same maturity.

However, a decrease in the overall level of interest rates is also reflected in the yields of these instruments.

The other side of the coin is that corporate bonds, in most cases, are classified as subordinated debt, an instrument that has a high degree of risk, in the bankruptcy scenario of the company that issued them.

Also, with a single exception, corporate bonds continue to be issued through private offerings, so they can hardly be considered a genuine investment alternative for the general public.

In addition to a higher risk premium, corporate bonds are overwhelmingly issued through private placements. This makes those instruments even less liquid and difficult to trade before maturity.

However, the global economic environment remains quite uncertain and there are major issues that could impact the economy and interest rate scenarios, starting from major geopolitical tensions and the trade tariffs being applied between the US and other countries.

Investing in real estate, with the rapid increase in prices in recent years, seems to pose more dilemmas. While the market remains dynamic, especially in coastal areas, in Tirana there seems to be a slowdown in price growth.

The trend towards stabilizing the number of tourists seems to make a weakening of the demand related to them expected in the future, especially in the daily rental market in Tirana and the coast.

On the other hand, the property market, especially the resale market, is going through a kind of crisis related to the revaluation of real estate.

Expectations for revaluation have caused many potential sellers to remain in a wait-and-see position until the revaluation begins, in order to pay lower income tax.

Real estate agents say that this situation has significantly slowed down the property market and such a situation is believed to continue until the revaluation process, which according to the latest draft law, is expected to begin in 2026.

The new rules imposed by the Bank of Albania on credit restrictions are expected to have the greatest impact on the segment of properties purchased for investment purposes.

In theory, these measures will reduce demand and pressure for further price increases.

Deposits remain dominant

Deposits continue to be the dominant product in the structure of Albanians' savings holding or investment. Bank of Albania data show that at the end of the year they reached around 1.68 trillion lekë.

This amount constitutes approximately 88% of Albanians' financial investments. Deposits increased by approximately 4.9% over the past year, but the continued negative effect of the exchange rate on deposits in foreign currency, mainly in Euro, must also be considered.

At the end of 2024, the Euro was exchanged for 98.15 Lekë, down 5.5% compared to the previous year.

The vast majority of Albanian small investors continue to trust safer financial products. Bank deposits are insured by law up to the amount of 2.5 million lek and up to this amount, placing money in the bank is a 0-risk investment.

The second most preferred product is Albanian government bonds and bills, which account for about 8% of individuals' financial investments, for a total amount of approximately 153 billion lek.

Last year, the value of individuals' investments in bonds and notes recorded a modest increase of only 2% (about 3 billion lekë). The decline in yields has had a rapid impact on reducing individuals' interest in investing in these instruments.

Next are quotas in investment funds, with about 55.4 billion lek, or 3% of the total. Investments in these funds last year increased by 21.7%.

After the shock they suffered in 2022, due to the rapid increase in interest rates, investment funds are in a recovery cycle. The decrease in interest rates in the primary market positively affects the returns from investment funds by influencing the increase in investments in their quotas.

Another financial instrument that continues to grow is corporate bonds.

At the end of 2024, the total value of bonds issued and outstanding by Albanian companies reached 29 billion lekë, up 39% compared to the previous year. They constitute about 1.5% of the estimated investment portfolio of individuals.

The statistics do not detail the portfolio by type of investor, but it is nevertheless estimated that the vast majority of these are investments by individuals.

Finally, investments in private pension funds at the end of 2024 were estimated at 12.9 billion lekë, or about 0.7% of total savings/investments of individuals held in financial instruments.

Last year, the funds' net asset value increased by 17% compared to the previous year.

The figures reported from 2024 this year by the AFSA also include indicators of closed pension funds, set up by employers for the employees of their companies.

Deposit interests, downward trend

The Central Bank's interest rate cut seems to have started to trickle down to interest rates on deposits in Lek. Since last summer, the trend of interest rates on deposits in the local currency seems to be downward.

According to the latest statistics from the Bank of Albania, the average interest rate on new deposits in Lek for May was 1.57%, down from 2.09% a year earlier.

However, the decline in the interest rate on new deposits has not yet led to a decrease in the average interest rate on current deposits, which is at levels similar to last year.

The average interest rate on Lek term deposits of individuals in May reached 2.42%, up from 2.36% in the same period a year earlier.

Interest rates on deposits in Euro remain lower and at levels similar to a year ago. For May, the average interest rate on new deposits in Euro was 1.16%, up from 1.12% a year ago.

The European Central Bank (ECB) has also been cutting interest rates for more than a year. This reduction has also been reflected in the benchmark indicators of the European currency markets, mainly the Euribor.

However, even in the period when ECB rates were higher, deposit interest rates in the Albanian market recorded a very modest increase.

In the case of the Euro, the competition of other financial products is weaker, because individuals do not have many low-risk financial investment alternatives, as is the case with the Lek.

Also, intermediation in Euro has higher costs for banks, because the Bank of Albania applies a zero remuneration rate for mandatory foreign exchange reserves, in addition to requiring higher levels of these reserves.

However, within the banking sector there is increasing competition for public deposits. Competition tends to become more pronounced during the summer months, when deposit inflows are greater, due to the tourist season.

This demand comes especially from banks that have been growing at a faster pace in recent years and that need to increase the funds that support lending growth.

Even in this period, some banks have come up with deposit offers that, at their maximum levels, are significantly higher than the averages reported by the Bank of Albania.

In this sense, for deposits, the market offers even higher returns than those indicated by the official average figures.

As for the maximum interest rates offered by the market for deposits, based on the rates reported by commercial banks to the Bank of Albania, 5-year deposits in Lek have interest rates reaching up to 4.4%, while those in Euro, up to 2.2%.

Falling yields further shrink new bond investments

Individuals' investments in Albanian government securities declined for the second consecutive year in 2024.

Data from the Financial Supervisory Authority (AMF) show that last year, purchases by individuals in the primary market for bonds and notes fell to 28.5 billion lek, down 23.9% compared to 2023.

A decline was also noted in the number of transactions, which dropped to 9,654, with an annual decrease of 29.3%.

By type of financial instruments, investment in treasury bills continues to hold the main weight.

AFSA figures show that the value of bond purchases in the primary market fell to 22.7 billion lek, an annual decrease of 23.2%. Meanwhile, investment in bonds shrank to 5.8 billion lek, 26.3% less compared to 2023.

The above data refer to transactions carried out through financial intermediaries licensed by the AFSA, mainly commercial banks. However, investment in treasury bills can also be carried out through special counters of the Bank of Albania.

According to the latest data from the Ministry of Finance, at the end of Q3 2025, it was estimated that individuals owned about 19.8% of total domestic public debt.

The decline in individuals' investment in bonds and notes is estimated to have been mainly a result of the significant decline in yields.

The reduction in the base interest rate by the Bank of Albania, the liquid state of the financial market and the reduction in risk perception led to a decline in yields for all Albanian government debt instruments during 2024.

There are currently ten brokerage companies operating in Albania that enable investment in Albanian government securities, nine of which are commercial banks.

Albanian government bond yields during 2024 and the first half of 2025 have followed a downward trend, influenced by high liquidity in the market and a lower demand for debt in the domestic market by the government.

After touching historic lows in the second quarter of the year, yields are showing an upward correction trend in July. However, they remain significantly lower than a year ago.

In the last auction held this year, 15-year bonds were issued with a yield of 5.57% (historical minimum), down from 7.45% a year earlier.

10-year bonds recently had a uniform yield of 5.05%, down from 6% a year ago.

The yield on 7-year bonds in the last auction was 4.29%, down from 5.36% in the same period a year earlier.

While the yield on 5-year bonds in the last auction was 3.73%, down from 4.88% a year earlier./ Monitor