Online Bank Deals Just Got More Attractive (compared to US Treasuries)
December 12, 2007
On the face of it a rate cut by the Federal Reserve along with signals that the Fed will cut some more in 2008 would appear to be devastating news to investors accustomed to finding great rates from online banks. However, there appears to be enough competition and thirst for deposits by online banks to keep the deals coming. Inevitably the rates will fall on money markets, CDs, savings, and checking accounts, but the most competitive banks will probably not drop their rates as much as the loss in yield we will see in comparable products like U.S. Treasuries, Government Bond Funds, Municipal Bonds, Commercial Paper, and Money Funds. A quick look at today's U.S. Treasury yields helps prove the point:
90-day US Treasury - 2.89%
180-day US Treasury - 3.19%
2-year US Treasury - 3.20%
3-year US Treasury - 3.16%
5-year US Treasury - 3.55%
10-year US Treasury - 4.14%
The mutual fund money markets we buy for safety and yield will reset their yields based on underlying securities like the US Treasuries listed above, meaning the Fed rate cut and action in the bond markets has an immediate impact on an investor's return. In comparision take a look at the online bank deals posted on the money-rates.com. They have over 20 banks with money market yields over 5%, over 10 banks paying 6.00% or better on Reward Checking accounts, and over 30 banks paying 4.00% or higher on a simple Bank Savings Account. For the strategic investor looking to lock-in rates before the banks adjust their deposit rates downwards they have over 15 banks listed with 5.00% or higher CD rates and another 30 banks at 4.75% or higher. Historically the most competitive of the online banks have been slow to adjust their rates downwards and we hope that this will be the case again this month and moving forward into 2008.
