Savings Account Rates Yet to Be Affected by Economic Optimism

The waiting game continues. All the macroeconomic signs seem to be lined up for higher savings account interest rates, and yet there has been no upward surge so far. Indeed, it would seem that higher rates may have suffered a setback last week.

From optimism about the economy to signs that the deflationary period is over, logic would dictate that interest rates should be rising. Indeed, since markets are usually anticipatory in nature, the best reason that could be given for rates remaining this low would seem to be an abundance of caution.

What Stock and Bond Markets Signal for Savings Account Rates

For anyone impatiently waiting for savings account interest rates to rise, two places to look for early clues are the stock and bond markets. As freely traded markets, stocks and bonds usually signal new trends much more quickly than the decisions of bank executives to change savings account rates. However, for stock and bond watchers, the signals lately have been curiously mixed.

Stocks have rallied strongly over the past three months, adding about 15% since the end of June after already having been on a roll since March. Normally, this would be interpreted as a sign of higher interest rates to come, for two reasons. First of all, stocks are reacting to growing optimism about the economy. Interest rates have been extraordinarily low in this recession, and an economic recovery would likely push them back upward.

Second, during a stock market panic such as we saw a year ago, there is a flight to quality--people rush into the bond market and thus drive interest rates down. As people regain their confidence in stocks, they pull some of that money back out of bonds, and rates can rise again.

This time around, though, even as stocks have rallied in recent months, bond rates have declined and suffered another setback last week. Apparently, many investors are in a show-me mode: if the recession is over, they want to see clear proof before abandoning their defensive investments.

What to Expect When Savings Account Rates Start to Move

Should bond yields start to rise, the next step for savings account rate shoppers would be to watch what follows on money-rates.com. If bond interest rates sustain a rising trend, the average savings account interest rate should start to move up. However, individual bank rates will move very differently. Some will react sooner than others, and some will rise much more aggressively than others.

This is much like what happens at gas stations when the price of oil starts to drop. Many gas stations are a little slow to reflect those falling prices, preferring to reap the higher profit margins for as long as they can. Others, though, try to go after market share aggressively, and these tend to lead the trend in price movements.

These days, in many communities there are Web sites where you can find the cheapest gasoline prices at local stations. If people do this research before spending $30 on a tank of gas, wouldn't it be wise to do similar research on money-rates.com for your savings account?

 

Source:

Stock Chart: S&P 500 Index • Yahoo Finance: http://finance.yahoo.com/echarts?s=%5EGSPC#chart1:symbol=^gspc;range=3m;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined • Yahoo! Finance

Bond Chart: 10-Year Treasury Notes • Yahoo Finance: http://finance.yahoo.com/echarts?s=%5ETNX#chart3:symbol=^tnx;range=3m;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined • Yahoo! Finance

 

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