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Online Savings & Money Market Account Rates 2021

Online Savings & Money Market Account Rates

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JP Morgan Chase Instrument Offers 9% Interest for 15 Years If The Stock Market Does Not Fall and The Yield Curve Keeps Its Slope

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JP Morgan Chase is currently syndicating what may be its most interesting Structured Note offering in years.

I have written about Structured Notes extensively on (most recently here; an introduction to and overview of Structured Notes is provided here).  These Notes are effectively bonds issued by the largest US banks (JP Morgan Chase, Morgan Stanley, Goldman Sachs, Bank of America, Wells Fargo and Citibank), and are not FDIC insured.  They can offer investors a yield well above and beyond rates that might otherwise be accessible.   But, in return for the high yields, investors have to accept kill provisions that could result in interest not being paid for long periods (even the life of the bond).   Investors obviously are also taking on significant risks associated with the credit of the issuer, prepayment or call risk, and the risk of investing in an instrument that has no secondary market (no liquidity).

Risks associated with Structured Notes ordinarily outweigh the upside that the issuing bank is offering; it is rare to find notes that are very compelling.  I have found that most notes tied to equities or baskets of equities offer hedge fund-like risk without commensurate return.  I also caution investors to avoid any structured notes tied to exchange rate risk (I personally invested a small amount of money in a Morgan Stanley issued structured note tied to the Brazilian Real a couple of years ago, only to have exchange rates move in a manner that has left my money tied up and earning 1.00% until the note becomes due in 2016).

For this reason, it is particularly rare that I find a Structured Note that interests me, and that happened with a recent JP Morgan offering.  The offering is a 15- year instrument which is not callable by the bank.  It pays 9% in year one and then in years 2 through 15, pays the spread between the 30 year and 2 year Constant Maturity Swap (CMS) times a factor 4, but no more than 9% annualized.  The Note also has a kill provision stating that it will not pay interest for any day in the previous quarterly period during which the S&P 500 traded below 25% of the S&P level on the day of pricing (e.g., were the S&P 500 at 1700 on the pricing date, that level would be set at 1225).

The Constant Maturity Swap (CMS), quoted on Reuters or Bloomberg, is essentially the rate at which banks trade with one another and matches the US Treasury rate very closely.  A 2 year CMS is currently at 0.48% and a 30 year CMS at 3.50%.  Provided that the spread continues to remain above 2.25% on each quarterly measurement date, the Note will continue to yield 9% annually (provided, of course, that the S&P kill provision is not met).  It the spread is some number below 2.25%, the Note will pay an amount four times that spread.  If the spread goes to 0 or if the 2 year CMS rises above the 30 year CMS (i.e., the yield becomes inverted), the Notes will pay nothing for that quarter.

A chart of the 2 and 30 year CMS spread for the last fifteen years indicates that there have been long periods when the spread has been less than 2.25%, during the 2000-2001 recession, between 2005 and 2008, and again in 2011 and 2012.  In fact, the spread narrowed to 0 and was briefly inverted in 2000 and again in 2006.  Nevertheless, as one looks out over the next 15 years,  it would not be unreasonable to believe that while there may be quarterly interest payments over the life of the Note that are lower than 9% or even missed as a result of a narrow spread, the yield curve ordinarily has and holds a slope. 

It, therefore, strikes me that the greater risk associated with these Notes is that the S&P will fall by more than 25% at some period shortly after the Notes are issued and remain there for many years.  Unlike a dividend paying stock which still pays a dividend after a large fall, this instrument basically becomes dead money after a market fall until either the market recovers or maturity is reached.  Since maturity is 15 years away and since the Notes are illiquid, investors could be sitting on this asset waiting for their money for a long period of time.

 Investors need to decide for themselves whether a Structured Note like this one is appropriate for their portfolio.  The Note described above is accessible at CUSIP No. 48126D7K9.  As with any Structured Note, you should carefully read the prospectus and fully assess the associated risks for yourself.  

Janet Yellen Nomination to Keep Low Rate Policy in Place

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Janet Yellen's nomination to be the Chairwoman of the Federal Reserve means the Fed's low rate policy will remain in place into the future.

The news of the government shutdown and the approaching fiscal cliff have grabbed the headlines from an even more important event this week for savers and borrowers – the nomination of Janet Yellen as the next Chairperson of the Federal Reserve. While current Fed Chairman Ben Bernanke’s specialty revolved around the Great Depression and how to avoid economic calamities, Ms. Yellen’s specialty and research has revolved around the impact of monetary policy on labor markets. A review of her policy speeches shows that she is willing to allow inflation to run up a bit in order to ease unemployment, and thus tends to support a looser monetary policy than some other economists and members of the Federal Reserve. She is quoted as saying: “To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.”

The NY Times has reported that Ms. Yellen helped organize the recent decision to continue the current level of quantitative easing and to include in the Fed’s December announcement that it would tolerate projected inflation at 2.5% in order to reduce the unemployment rate.

In general, Ms. Yellen has voted with Chairman Bernanke most of the time on issues revolving around quantitative easing and she broadly agrees with him on monetary policy. She has also been one of the chief proponents and architects of the Fed’s asset purchases.

Critics say that she is too easy on money and that her views promote asset bubbles, like the Internet, housing, and now potentially foreign markets.  

The bottom line is that savers and borrowers shouldn’t expect to see any major changes in policy when she joins the Fed. She is expected to work to continue to make the Fed more consistent and continue to refine the Fed policymaking process, but her views dovetail closely with Bernanke’s.  If there is to be any change, it might be that she lets quantitative easing run a bit longer than Chairman Bernanke, leading to lower rates for a longer period of time.

The NY Times had a good article summarizing her background and views called Yellen’s Path From Liberal Theorist to Fed Voice for Jobs.


If the US Defaults in October, Is Cash the Only Safe Place to Hide?

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Cash is always the safest place to put your money in a crisis. Against the prospect of a dramatic slowdown in the economy stemming from a sovereign default, cash again seems like a safe haven. A US default will lead to real stock and bond market declines and almost certainly a drop of commodity and real estate values.

Even in periods of historically low rates on cash instruments, savings and money market accounts often outperform all other instruments, especially if all other instruments suffer a synchronized decline following major economic disruptions. 

With online instruments offering 0.85% to 0.90% these days, cash is not sexy.   In fact, those who stayed heavily in cash over the last four years have missed out on a historic move in the stock market.  They have also missed out on bond and asset price appreciation.  Perhaps most importantly, they have lost purchasing power as savings and money market accounts have not kept up with inflation (especially after accounting for tax consequences).

Today, real estate, bonds and the stock market have all seen dramatic and real runs, not all entirely consistent with economic realities.  Regardless, the impasse in Washington and the prospect of a sovereign default by the US if the debt ceiling is not raised, argues especially persuasively now in favor of stepping aside for a bit. 

Of course investors with a time horizon beyond a couple of weeks would be imprudent to dump all assets and move completely into cash. With the Fed having chosen not to taper and the dovish history of the likely incoming Chair, Janet Yellin, who is committed to keeping rates low until unemployment falls below 6.5%, cash may not be an ideal place even at this time to assign new money. 

Many private and institutional investors, rather, have been focusing on high quality corporate bonds ever since the Fed’s announcement in September that it would not begin tapering at this time.  As I survey the landscape, one bond-like instrument that seems particularly interesting at this point is Public Storage’s preferred stock. 

I first wrote about Public storage’s preferred stock on BestCashCow in 2012.   All of the classes of Public Storage preferred stock that were available then were called at par value ($25) late in 2012 and early in 2013; the company subsequently issued new shares in the form of Class V and Class W at lower yields - approximately 5.25 and 5.45%.   Each class pays dividends quarterly and both traded above par earlier this year, soon after they were issued.  As of the date of this publication, however, both shares are significantly discounted with the V shares trading around $21 a share and the W shares around $20 a share.  In other words, both shares are trading with effective yields, plus or minus, of 6.45%.

While these shares have fallen quite sharply over the summer as long term bond yields went up, Public Storage (PSA) appears a very safe company in the face of a potential new Congress-initiated recession.  The Company is efficient and effective and its business model is pretty much recession proof.  Its debt and preferred stock, as a percentage of gross assets, is at historically low levels (below 30%) and it faces virtually no debt refinancing obligations in 2014.

As I noted in my 2012 article, preferred stock is an animal in and of itself and is ordinarily not a good place for individuals to park cash (largely because they are instruments of indefinite duration and because individuals cannot take advantage of many US tax incentives on ownership of preferreds made available to corporate purchasers).

Public Storage’s preferred stock is currently rated Baa1 by Moody’s, having been upgraded in late 2012.  While there is real risk of a decline in principal (a continued decline in principal for holders of the initial issuance) if and when interest rates rise again, a 6.45% yield on a Baa1 instrument is not otherwise attainable at the moment. Therefore, Public Storage’s preferred stock just might be a place for those investors seeking protection and return to assign some of their cash while waiting for Washington to sort itself out.