Where are the Banks Offering Inflation-Linked Deposits?
March 24, 2009
If you do a search for banks offering rates which are indexed to the S&P 500, Dow Jones Industrial Average, or yields on U.S. Treasuries you can find various money market and CD products. Missing from the list of variable-rate offerings is anything tied to inflation. There are inflation-linked securities available, but surprisingly there are no banks directly advertising an inflation-indexed CD or money market.
Banks do offer variable-rate deposit products. Banks like Capital One Bank who offers a Treasury Indexed CD or Pacific Trust Bank with their Indexed Money Market provide customers a FDIC-insured account with an interest rate that changes as Treasury bill yields change. The problem for investors is that Treasury yields may not necessarily increase as fast as inflation as measured by the Consumer Price Index (CPI). The Treasury Department offers a product called TIPS (Treasury Inflation Protected Securities) and the I Savings Bond, which both have rates of return linked to the trailing rate of inflation in the United States. It is about time for some banks to step up with a similar product.
The advantage for depositors would be that their savings account could be protected against a sudden increase in inflation. Because inflation erodes the value of money, hedging against inflation with a portion of your savings could be a smart step. The banks, to their advantage, would be offering a very low-yielding account because the economy and prices are stagnant right now. But for a depositor earning low interest rates anyway the difference is minimal. For an inflation-indexed bank product to work, what would be mandatory (and obvious) would be that the banks would need to protect principal against deflation. In other words if inflation was negative (called deflation) a depositor's interest rate would be 0.00% and not negative. Now which bank will be first to offer this product?..........