Optimistic Signs for Savings Account Rates

2009 was a dud of a year for savings account rates and bank rates in general. There are times when financial markets vacillate back and forth, buffeted by cross-currents in the macroeconomy. Recent months have been one of these periods. After a year or so of consistently bad news about housing prices, stock prices, and banking which seemingly drove all interest rates lower, economic signals have been more optimistic in the past few months. Despite these promising signs, bank rates have remained stubbornly low, even while stocks and housing markets have rallied.

Only in December were there signs of hope in the Treasury bond market. With this indication that market interest rates are decisively moving higher, it might not be long before savings account interest rates follow.

Treasury Yields Break Into a Higher Range in December

Taking 10-year Treasury rates as an example, December 2009 may have marked something of a breakthrough for post-recession interest rates. From September through November, 10-year Treasury yields traded between 3.20% and 3.60%. Every time it looked like some optimistic news about the economy might boost those rates into higher territory, some new doubts sent bond rates sliding back down.

The pattern in December was different, however. For most of the month, there was a steak of almost uninterrupted progress toward higher territory for Treasury rates, so that by Christmas week, 10-year Treasury yields broke through the previous range, to 3.7%.

Encouragingly, this progress in the bond market was evident across the yield curve, from short-term to long-term Treasuries. All were trading at higher yields by Christmas than they had been when the month began.

Unfortunately for depositors, bank rates aren't forced to follow Treasury rates, at least not with the same market agility. Bank executives have the luxury of taking a wait-and-see approach, and they are especially likely to exercise this luxury when it comes to raising rates. Still, Treasury bonds and bank deposit accounts are in competition for capital to some degree and ultimately do react to many of the same economic forces over the long haul. While bank rates won't shadow every little twist and turn in the Treasury market, they will tend to follow the same long-term trends.

Inflation and Savings Account Rates

Long-suffering bank depositors will note that their savings account rates are only moving higher after inflation has already moved higher, so increases in savings interest rates now are essentially playing catch-up with inflation. From a depositor's perspective, the return of inflation is certainly the most negative economic development of the past few months. Not only has year-over-year consumer inflation moved into positive territory of late, but producer prices have also shown some particularly troubling increases.

Even so, the heavy retail discounting that marked the holiday shopping season demonstrates that in a weak economy, it's difficult for prices in many sectors to increase that quickly. Any continuing pressure that retailers feel to cut prices will trickle back to producer prices--and unless worldwide economic growth accelerates with unexpected vigor, those producer price increases will also be moderated.

Finally, although seeing savings account interest rates rise only because inflation has already risen is not ideal, it's better than seeing bank rates fail to react at all. In that context, 2009 ended on an optimistic note for bank rates, and here's hoping for more optimistic news for depositors in 2010.

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