Money Funds Returning Close to 0% - Consider a Savings Account

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Here's a Wall Street Journal Article that's stating the obvious if you read BestCashCow. Money market funds, not money market accounts, are returning close to 0%. On BestCashCow, the highest money market fund rate is W&R advisors with a 0.67% 7-day trailing average. With inflation, or deflation, the returns are a bit better (add another 1%) but still well below the return on an FDIC insured savings account, money market account, or CD.

The Journal article even suggests short-term bond funds although the article states that last year, "Vanguard Short-Term Investment Grade took a beating—returning a negative 6.9% in the six months through November."

That's not where I want to park my "safe" cash. Go with a savings account or a CD. And if you have several million dollars to invest and are worried about FDIC insurance limits and don't want to run around opening 10 different bank accounts, then consider the CDARS program. The Certificate of Deposit Account Registry allows individuals to get up to $50,000,000 in FDIC insurance from a single bank when opening a CD.


Spread Between Savings and CD Rates Widen - Weekly Rate Update October 2

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Is the economy headed for a recovery or are we getting ready to sink back into recession? Is the stock market rise for real? Since reaching a bottom of 6,448 in March the market has risen to nearly 10,000 in late September (9,820). Despite the markets rise, bond yields have remained flat.

Is the economy headed for a recovery or are we getting ready to sink back into recession? Is the stock market rise for real? Since reaching a bottom of 6,448 in March the market has risen to nearly 10,000 in late September (9,820). Despite the markets rise, bond yields have remained flat.

In an article entitled, "What the Treasury Bond Market Tells Us About the Economy" Sam Cass from BestCashCow writes:

"So, I'd say we have an ecomomy that is not as strong as the last couple of months has made appear, a stock market that is ahead itself and that will fall back, and with banks, Wall Street, and foreign investors buying and holding Treasuries as the safest investment in an otherwise risk-fraught world.

I've learned that divergences in assets never last. Either the stock market must come down or Treasury yields must go up. I'm betting both will happen."

Bond yields are generally considered an even better leading indicator of future economic conditions than the stock market.

Looking at the yield curve we have developed for deposit accounts, we can see that the spread between savings rates and 36-month CDs is nearing its high since we began tracking last year. While longer term CD rates have remained stable and even gone up a bit, short term CDs and savings account rates continue to drop. The yield curve is steepening which is normally a sign of economic recovery and expansion.

SavingsandCDRateSpread

All of this seems to fit a scenario described by Dr. Doom, otherwise known as Nouriel Roubini. He said today that "there are signs right now that the recession might be close to over,” and that there remains a “a risk” of “a double-dip recession.” What the data seems to indicate is an improving economy, but one that is still teetering that that could go back into a recession once the government stops spending money or if there is another shock to the system. A fragile economy.

For now, rates seem to be watching and waiting.

Savings rates inched down 3 basis points in the past week while 36-month CDs crept up 3 basis points. That created the 6 basis point widening between the two products. Both 12-month CDs and 5-year CD rates stayed the same.

Like the economy, rates seem to have pretty much hit bottom. The question now is when they will go back up. It may be some time.

SavingsandCDRateAnalysis


Savings and CD Rates Virtually Unchanged - Weekly Rate Update Sept. 25

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There were two pieces of information this week that I found quite interesting. The first is an article that explores how bond prices are making the case for inflation or deflation. According to the original article posted on Marketwatch, bond prices seem to indicate that inflation is a greater probabiliy than deflation.

There were two pieces of information this week that I found quite interesting. The first is an article that explores how bond prices are making the case for inflation or deflation. According to the original article posted on Marketwatch, bond prices seem to indicate that inflation is a greater probabiliy than deflation.

Juxtapose this with the Fed's FOMC statement:

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

There is over $1 trillion in idle capacity in the United States alone and it's hard to imagine prices increases in this environment. Of course, a continued decline of the dollar could eventually spur higher prices as import prices rise.

So, the environment we have discussed in the last couple of weeks is coming into greater relief - rising interest rates in a low inflation, low growth environment. It's not stagflation, it's stagrisingrates.

There was little change in savings and CD rates last week. In fact, for the first time since we began tracking average savings rates, there was no change at all. CD rates barely budged, with the 12-month CD dropping 1 basis point, the 3-year rising 2 basis points, and the 5-year average rising 2 basis points.

Like the economy, rates seem to have pretty much hit bottom. The question now is when they will go back up. It may be some time.

There's no significant change to report in the spread between savings rates and 36-month CDs. That's not surprising considering both rates showed barely any movement. Watch this chart to see who will blink first:: will longer term CD yields come down in the absence of any sign of inflation, or will short term savings and CD accounts rise as the economy strengthens? My guess at the moment is that long-term yields will start to rise even if the economy doesn't improve.

Based on this data, it would seem that any rate increases won't come until sometime in 2010. Nevertheless I would stay short-term and wait. An improving economy and a glut of Treasury debt will eventually put some pressure on rates.

SavingsandCDRateAnalysis

The spread between the average BestCashCow savings rate and 36 month CD rates remains steady as the economy stabilizes and investors, banks, and consumers wait to get the next read on where the economy is going.

SavingsandCDRateSpread