NY Times Article on How Low Interest Rates Hurting Investors

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Every now and then the mainstream media will do an article on the hatchet job that the Fed has done on the savers of this country. Today they printed one such article.

Every now and then the mainstream media will do an article covering the hatchet job that the Fed has done on the savers of this country. Today they printed one such article, entitled At Tiny Rates, Saving Money Costs Investors.There's really nothing in the article that we haven't said a million times before: the Fed is reinflating the economy at the expense of savers, the very investors who were least responsible for the economic collapse. The elderly who lived off a fixed income are being especially hard-hit as saving and CD rates tumble from 5-6% to under 2%.

Perhaps the most interesting part of the article was the following quote:

"Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

I've written about this before also and it's appalling. What the banks do is borrow money from me and you, or even the Fed for 1% and under and then lend it out at 5-6%. They can't lose money. Banks are reporting profits because they are in a no-lose interest rate environment and also because they changed the accounting rules to make their bad assets disappear. You'd think they'd be sharing the wealth, but instead, credit is tight, and the banks are raising credit card rates and lending standards.

We help them recapitalize and strengthen and they stick us with the bill. Oh, and they pay themselves nice fat bonuses. Give me a break. A high schooler could recapitalize a bank in today's interest rate environment.

Is there anything you can do? Yes, if you plan to deposit money, make sure you deposit it into a high yield savings or cd account. You might as well get the best savings rate or best cd rates you can. Reward the banks that are willing to pay a bit more for your hard-earned cash.


Savings and CD Rates Drop While Mortgage Rates Up - Weekly Rate Update

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Savings and CD rates dropped last week while mortgage rates rose, reflecting the steepening of the Treasury yield curve. The Fed continues to hold short and medium term rates low and longer-term rates are responding to inflation fears.

It was a relatively quiet week as markets and consumers ready themselves for the Holiday season. The biggest news had to do with the increase in the yield between the 2 year Treasury Note and the 30 year bond. The yield curve earlier in the week was the steepest it's been since 1992. What's behind this? The Fed is keeping short term rates low. Long-term rates are rising though as investors look ahead to increased Treasury security offerings and investors become more and more concerned about nflation. Still, for all the worry about inflation, there is remarkably little on the horizon. As this Wall Street Journal article indicates:

"Based on prices of U.S. Treasury Inflation-Protected Securities, where principal and interest payments are adjusted for changes in the CPI, inflation is expected to be less than 1% in 2010, says Michael Pond, Treasurys and inflation market strategist at Barclays Capital.

Looking a little bit further out, TIPS prices suggest inflation is expected to be 1.5% per year over the next five years and roughly 2.1% over the next 10 years, according to Barclays. "

Some investors feel that TIPS are just cheep and haven't yet priced in future inflation. Maybe so. But there is still tremendous slack in the economy and it is far more likely we'll see an asset bubble before we see a jump in CPI inflation.

The impact in the steep yield curve can be seen in the dichotomy between deposit and lending products.

CD and Savings Rates

Short term and medium term rates remain low and dropping.

All savings and CD rates dropped last week. Savings rates dropped last week by 4 basis points from 1.61% APY to a new low of 1.57% APY. One year CD rates also dropped by 4 basis points to 1.95% APY while 3 year CD rates dropped by 8 basis points to 2.72% APY. Five year rates dropped by 9 basis points from 3.35% APY to 3.26% APY. It's uncharacteristic for 5-year rates to drop by so much and after rallying a bit from summer lows of 3.22% APY are closing in again on that level.

Looking at the yield ratio we have developed for deposit accounts, the spread the spread between savings rates and 36-month CDs came down slightly due to the drop in 3-year CD rates. This drop in longer-term CD rates reverses the slightly upward movement that we saw since the summer. It's possible we'll see 5-year CD rates below 3% APY in the next couple of months if the current trend continues.

My guess is that the downward blip in 3 and 5 year CD rates was a temporary phenomena. Treasury notes and bonds saw their yields rise last week and as the Fed begins to remove stimulus it's easier to see rates going up in the future than going down. It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

Longer term mortage rates for the first time in several weeks.

According to the BestCashCow rate tables, the average 30-year fixed rate mortgage rose from 4.957% the previous week to 4.971%. The fifteen-year fixed-rate mortgage average went from 4.4% to 4.43%. While mortgage rates rose on most products, they are still close to historic lows. This is a good time to refinance and these rates won't last once the Fed ends its mortgage and Treasury Bond buybacks. Many analysts expect rates will increase into the 6% range once this happens.

You can compare the best mortgage rates in our new mortgage section.


Savings, CD, and Mortgage Rates Hit Record Lows - Weekly Rate Update

Rate information contained on this page may have changed. Please find latest savings rates.

Savings rates stayed at the 52-week low last week, holding steady at 1.61% APY. One year CD rates took the steepest dropped by 1 basis point to a new BestCashCow low of 2.00% APY. According to the BestCashCow mortgage rate tables, the average 30-year fixed rate mortgage is below 5% at 4.957%. The fifteen-year fixed-rate mortgage average is 4.4%.

The Labor Department provided an early Holiday present today, providing a job's report that was far better than anyone expected. Yes, the economy still shed jobs, but only a seasonlly adjusted 11,000 in November versus projections of 100,000. The unemployment dipped for the first time in months, going from 10.2% to 10%. The employment news caused the dollar to strengthen and gold to plunge on expectations that the Fed may begin raising rates sooner than expected. Ironically, this has happened at the same time that savings rates, cd rates, mortgage rates, and muni bond rates are hitting multi-year lows. Coincidence? Probably not. The economy seems to have bottomed and rates are a lagging indicator. For savers, the night is darkest just before the dawn, and we may be seeing the faint glimmers of sun. For borrowers, the golden days may be coming to an end. If you were thinking of refinancing or buying a home, now is the time. Mortgage rates are at record lows and if the economy continues on its current trajectory, will begin rising soon.

CD and Savings Rates

Savings rates stayed at the 52-week low last week, holding steady at 1.61% APY. One year CD rates took the steepest dropped by 1 basis point to a new BestCashCow low of 2.00% APY. Three year rates actually rose by 8 basis points from 2.72% APY to 2.8% APY due to the addition of several new banks to the rate tables with aggressive pricing. Five year rates also increased by 2 basis points to 3.35% APY.

Looking at the yield ratio we have developed for deposit accounts, the spread the spread between savings rates and 36-month CDs reached a new all-time high. As we discussed, 3 year (36 month) CD rates rose due to aggressive pricing from several banks new to the rate tables. Nevertheless, the fact remains that longer-term CD continue to inch up even as savings rates remain steady or decline. If the economy continues to firm up, look for 3 and 5 year CD rates to continue rising and the ratio to go even higher.

It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with soaring equity markets and signs that the economy may be coming back to life. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

Once again, savers' pain is a borrower's gain. Mortgage rates again hit record lows over the past week. According to the BestCashCow rate tables, the average 30-year fixed rate mortgage is below 5% at 4.957%. The fifteen-year fixed-rate mortgage average is 4.4%.

MortgageRateAnalysis

You can compare the best mortgage rates in BestCashCow's new mortgage section.