US Savings Rate Hits 14-Year High, Pushing Down Deposit and Treasury Rates

The Commerce Department reported that US savings rate hit a 14-year high of 5% last month, up from .1% a year ago as Americans moved money out of the stock market and socked cash away.   At an annual rate, personal savings rose to a record $545.5 billion. 

At the same time, the FDIC reported that in the fourth quarter of last year, deposits in banks increased by $308 billion, the largest increase in 10 years.  This cash flooding into banks has depressed rates on savings accounts, money markets, and cds as banks don't need to set such competitive rates to attract consumer deposits.    

Treasury bonds have also benefitted from a flight to safety.  According to a Bloomberg article:

Merrill Lynch & Co. says U.S. bonds owned by individuals likely will account for 2 percent of households’ financial assets by 2013, up from 0.2 percent now. That level hasn’t been hit since the months following the Sept. 11, 2001, terror attacks, Federal Reserve data show. Americans’ direct purchases will rival the $1 trillion foreigners probably will buy in the next five years, Merrill predicts.

Increased demand, fueled by the highest U.S. savings rate in seven years and record domestic stock and real estate losses totaling $13.5 trillion, will support Treasury prices, said Tony Crescenzi, chief bond market strategist at Miller Tabak in New York. That will help keep yields and consumer interest rates down even as the government borrows record sums for President Barack Obama’s $787 billion stimulus plan.

Needed Savings

While the higher savings rate will cause some short term pain for the economy and savers by lowering returns on bonds and deposit accounts, and dampening demand, over the long-term it is part of the healing process.  US consumer debt had hit record levels and until consumers can dig out and repair their personal balance sheets, the economy cannot begin to move forward.

Savers who are interested in holding cash should shop around.  Parking money in a brokerage sweep account is not a good way to maximize your return.  Savers should also make sure they are getting the highest rate on their savings, cd, and money market funds. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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