Personal Finance Blog By MoneyRates - December 2007
November 28, 2007
Tips on Buying Treasury Inflation Protected Securities (TIPS)
The Treasury Department issues a security called Treasury Inflation-Protected Securities (TIPS) which pay investors a fixed rate of interest set at auction and adjusts principal semi-annually based on the change in the Consumer Price Index for the preceding six months. The U.S. Treasury offers auctions on TIPS quarterly in denominations as small as $1,000. Brokers and dealers maintain a secondary market in TIPS securities allowing investors to buy or sell them at any time. TIPS pay interest to investors semi-annually based on the inflation-adjusted principal at the time interest is paid and the original interest rate. At maturity TIPS can be redeemed for the inflation-adjusted principal or in the case of deflation (negative CPI growth) for the par mount of at the time the security was purchased.
The two major benefits of TIPS are:
(1) Principal is backed by the full faith and credit of the United States government. Widely considered the highest level of safety achievable by an investor.
(2) Principal is indexed to the CPI, thus the real purchasing power of the principal and interest is guaranteed to keep pace with inflation.
More information about TIPS from the U.S. Treasury Department is available here.
Recent TIPS auctions results are here.
CPI/Inflation data is available here.
The 4 Online Bank Stalwarts: VirtualBank, Capital One Bank, First Internet Bank, and Bank of Internet
November 20, 2007
One of the biggest questions asked about online banks and the deposit deals they offer is whether or not they will continue to offer competitive deposit rates or will new customers who open a promotional checking account, savings account, money market account, or CD find their rates lower in the future. The annoyance and cost of switching online banks can be frustrating, so banking customers are looking for online banks who are consistent and offer good service. Four banks have stood the test of time (+6 years) and have consistently offered deposit rates in the highest 5% of the rates posted by FDIC-insured banks, frequently posting rates in the top ten for a particular product. The four banks who earned the distinction of being recognized by The Savings Investor as the most consistent of the online banks are:
(1) Capital One Bank - Capital One absolutely tore up the competition with longer term CD rates that were at one time 30 points ahead of the competition. Worries about the profitability of the bank and loan losses cooled off their rate aggressiveness a bit, but their deposit rates remain extremely competitive on money markets and CDs. This bank is one of the very few to offer 5.00% yields on deposit terms from one year to five years.
(2) Bank of Internet - The most consistent of the four over the last six years, Bank of Internet steadfastly offers checking, money market, savings, and CD rates near the top of the list for each category. In addition the Bank of Internet has offered very unique checking accounts called Freedom Checking, Boomer Checking, and Senior Checking with special features based on the age of the accountholder. All three checking accounts are currently offering an APY over 3.40% over 7 times the national average on similar-type checking accounts. A customer at this bank has had a solid six years of being able to earn superior rates without any unfortunate rate surprises.
(3) First Internet Bank - First Internet Bank is a relatively quiet bank based out of Indiana. This bank exemplifies the positive side of online banking for consumers who earn high rates on their deposits and pay much lower fees than they would at a local bank or by banking with one of the large multi-branch banks. First Internet Bank has popped in and out of the rate lists over the last six years without every truly disappearing. Customers have reported a positive experience at this bank with customer services complaints very minimal. First Internet Bank is one of the few online banks who offer business accounts rates equal to or nearly equal to their consumer rates.
(4) VirtualBank - This online bank has not only posted deposit rates in the top 5% for the last 6 years, they have offered some of the best loan rates particularly on auto loans. VirtualBank has offered better deals on money market accounts and CDs over the years than checking and savings accounts and has even occassionally topped the list of best rate offered by a FDIC-insured bank on a particular term or product.
Congratulations to each bank for their distinction and earning our respect. Please visit each bank's site for more information.
November 19, 2007
Major companies like Bank of America Corp, Legg Mason, Inc., SunTrust Banks Inc., and Citigroup Inc. are reported to have been forced to invest funds into their own money market funds to prop up the net asset value at a stable $1 after incurring losses in a complex financial instrument called SIVs or Structured Investment Vehicles. Money fund managers have used SIVs to boost their yield, while other managers like those at Vanguard and Janus Capital Group have stated that their mutual fund company have not used SIVs in their money market funds.
Mutual fund companies have been put to the test before. Notably, episodes in 1994 with money market derivatives and in 1997 with delinquencies with municipal bonds and commercial paper held by money market funds, both prompted the parent companies of the funds to jump in and infuse liquidity to ensure a constant net asset value of $1. This strong track record of investors being shielded from losses and continued government regulation make money funds a reliable investment tool for cash.
Current money fund yields here.
November 15, 2007
The financial headlines have been full of stories about the trouble experienced by a number of money funds. Large companies like Bank of America Corp. and Legg Mason Inc. among others have been forced to infuse their money market funds with money to cover for losses and prevent having to "break the buck" and allow their net asset value to fall below $1. The good news for money market fund investors is that the losses caused by complex investments designed to boost yields have been limited to a minority of mutual fund companies and those companies have made investors whole. Moving forward investors may want to better understand the underlying holdings in their money market funds and buy funds from a company which is large enough and finiancially stable enought to seem reasonably assured of infusing funds to cover any losses. The fallout is probably far from over, but money market fund managers will certainly have learned a lesson from their risky investments. The drop in yield which may occur due to a safer investing environment will be worth the peace-of-mind. Mutual fund companies who keep their money market funds with weighted-average maturities of less than 50 days and holdings in government securities or commercial paper rated AAA stand a better chance of providing a stable fund, but with yields which are still higher than U.S. Treasuries.
Investors can find a list of money market funds here.
Posted in: Money Market Funds
November 12, 2007
The Federal Reserve has lowered their benchmark interest rates 75 points in 2007 while publicly stating it remains inflation-vigilant. The futures market, where contracts are traded based on the future value of the Federal Funds Rate, is currently discounting in another 75 ppint rate cut between now and the summer of 2008. Online banks who largely ignored the first rate cut by the Fed in the summer of 2007 have now nearly all lowered their deposit rates on checking, money market, CD, and savings accounts. This growing consensus that short-term interest rates are heading lower in 2008 does not necessarily mean that longer rate will also be lower. Many economists believe that the spread between short and long rates will widen. Investors used to seeing little incentive to buying a CD or Treasury with longer than a six month maturity may finally see in 2008 a significant difference between the rates offered on mutual fund money markets or bank money markets and the yield offered on mid-term and long-bond funds and CDS.
The other by-product of an environment in which short-term rates are falling and longer term rates increasing is the impact on mortgage rates. Variable rate mortgages, especially those indexed to the prime rate, may have falling rates which will surely help the American consumer, while fixed-rate mortgages may increase in rate. Homeowners need to fully understand to which index is used as a benchmark for their mortgage because the LIBOR rate, Treasury yields, and the Prime Rate do not move in tandem and each index has a different forecast.