Global Interest Rates and CDs
April 24, 2009
Savers have been having a tough time of late. Money fund yields are below 1%. Bank deposit rates continue to fall to the point that most banks now offering below 2% on money market accounts, savings accounts, and CDs. Furthermore, short-term Treasury yields are once again approaching record lows. In fact, the 90-day Treasury Bill was yielding as low as 0.10% earlier this week. Is it conceivable that investors will have to take a loss (negative yield) just for the safety of the United States Treasury Department? Let's hope not, but we are only 10 basis points away from that mark. Savers with ambitions for yields of 4% or 5% are finding it hard, if not impossible, to find those yields without sacrificing safety for the better rates of return.
It may not provide comfort to savers longing for interest income, but interest rates globally have been driven low just like they have in the United States. Central banks across the world, who have been battling recession and tight credit markets, have pumped money into their economies as well as lowering benchmark lending rates. What is interesting about this global interest rate cycle is that it is highly coordinated. Ben Bernanke has travelled to Europe to advocate coordinated policies and major central banks announced an unprecedented 50-point rate cut last fall. Central banks are typically just responsible for the monetary policy of one country or of a group of member countries. In fact, just like a poker game central banks will sometimes try to read each other to maximize their potential moves. But the poker game is on hold while central banks try to avoid a deepening global depression. Listed below are the current interest rates controlled by central banks in the following countries:
European Central Bank 1.25%
Hong Kong 0.50%
You can find countries with like Egypt or Iceland with prime lending rates and deposit rates over 10%, but converting U.S. dollars into their local currency is highly risky.
All these low interest rates across the world, mean that savers in other countries are facing the same issues as savers in the United States. Even the CD rates offered by Everbank on ther WorldCurrency CDs are less than spectacular. Only a 6-month CD demoninated in the South African Rand yielding 6.09% and a 6-month CD demoninated in the Mexican Peso yielding 5.83% offer higher rates than the best 6-month CD rates listed at MoneyRates.com. But, there is also a big difference between the EverBank WorldCurrency CDs and FDIC-insured CDs. That is difference is called currency fluctuation. The different spot prices between the U.S. dollar and the local currency that the CD is denominated in can adversely affect the rate of return on the foreign-denominated CD and even lead to losses. Savers who have been accustomed to FDIC insurance should not try to find CDs in foreign countries that offer higher rates without understanding the currency risk.