Personal Finance Blog By MoneyRates - April 2009
April 30, 2009
President Obama reached his 100th day in office this week with huge questions lingering regarding the effectiveness of his policies and strategies. While it may take years or decades to objectively evaluate the Obama Administration's response to the financial Pearl Harbor he has faced, at least for this milestone week Obama enthusiasts point to the positive. Senator Arlen Spector jumped off the Republican ship to the Democrat side, leaving Democrats one Senator short of the 60 needed to be filibuster-proof. And while many of backward-looking economic releases are shockingly bad, Obama's economic team is quick to highlight that some of the forward-looking economic indicators are improving.
One thing that no one deny about Obama and the government's economic plans is that they are ambitious. Driving short-term interest rates to zero is not enough, the Fed and Obama are in consensus that buying mortgage debt securities and Treasury securities in large quantities is needed to help keep long term interest rates low. All of this spending by the Fed and Treasury Department comes on top of various bailouts, not to mention the Obama administration's other spending for initiatives in health care, education, and green technology. The question, of course, for many economists is will all this government spending lead to runaway inflation?
A burst of inflation in the U.S. economy would increase interest rates. Borrowers don't want to be caught in variable loan or mortgage if this happens. Savers, on the other hand, can be provided with some opportunities to increase their investment returns. For instance, a saver with a one year CD earning 2.00% could take a 90-day penalty and reinvest at a much higher rate to end up earning more money on their CD. With a spike in inflation, savers with money market accounts and savings accounts could use a site like MoneyRates.com to keep on top of the latest rate increases and improve their monthly interest earned. So remember with all the talk of government spending, interest rates may not stay low forever.
April 29, 2009
It was reported this week that housing prices in the U.S. declined by 18.6% for the year ending February 28, 2009.
Let's take another example. Over the same time period, the price of oil fell by more than half.
Think about it -- those are two pretty dramatic examples of deflation. They are dramatic both in magnitude -- the sheer size of the drops -- and in how unusual these declines are. What's more, these are price declines that really have an impact on the average person's budget. After all, how many things cost you more month-to-month than housing and energy?
Numbers like these really put interest rates into perspective. Normally, savers need a solid return on their money just to keep up with the rising costs of housing, energy, and other expenses. When those costs are actually falling, any positive return is icing on the cake. Or, literally and figuratively, money in the bank.
So, with prices falling, the 2.5% to 2.75% you can earn on a certificate of deposit is pure profit. So is the 2.25% to 2.5% you could get on a money market account, or similar rates available in savings accounts.
The point is the need to re-think these rates in the deflationary context. When housing and oil prices were going up by 10% or more each year, even earning interest rates of 5% 0r 6% could feel like fighting a losing battle. Now, with key prices falling sharply, even more modest interest rates are a win for consumers.
Posted in: Miscellaneous
April 28, 2009
Recent economic releases have increased the optimism of some market analysts about the U.S. economy, although you may have to listen or read very carefully to find the good news. The glimmers of hope are hidden in phrases like, "the pace of declining home sales has slowed" or "growth was forecast to be worse than reported." Not exactly enough to pop the champagne bottles because the recession is over, but it just might be enough to start asking the question: When will inflation creep back into the economy?
The expectation of inflation is enough to increase longer-term interest rates as measured by yields on U.S. Treasury notes and bonds. We also know that when the yields on 2-year, 3-year, and 5-year Treasury securities increase, banks are likely to increase the rates on their certificates of deposit of the same term. What's interesting is that some of the more competitive online banks who post their rates on MoneyRates.com will increase CD rates with just the strong prospect of inflation. This means we may not need to even wait for the CPI report revealing inflation before we could see an increase in CD rates from some leading online banks. The spread between the 10-year Treasury Bill and the 10-year Treasury Inflation Protected Security (TIPS) has increased to over 1.50%, marking its highest level in over seven months. This is one of the best indicators that inflation expectations are increasing. If the TIPS spread were to reach 2.5% or higher, investors expectations for inflation will have exceeded the Federal Reserve's target range. We may not be there yet, but these first hints of inflation may be good for CD rates.
Tagged in: best cd rates
April 27, 2009
Diversified portfolios are generally split in some measure between growth-oriented and income-producing assets. With the stock market alternating between 20% declines and 20% rallies over the course of just a few month, there are certainly some agonizing decisions to be made about the growth component. However, there are also important decisions to be made about the income side of your portfolio.
When it came to income investments, over the past thirty years bonds have made more sense for the typical portfolio than shorter-term vehicles like money markets or certificates of deposit. The reason was two-fold. First, the normal yield curve is such that longer-term vehicles pay more interest than shorter-term ones. Second, longer-term bonds lock in income levels for a longer period of time than money markets or certificates of deposit.
However, with interest rates having fallen so much, it's time for a fresh look at the income side of your portfolio. Bonds issued over the past several years, when interest rates were higher, are now trading at substantial premiums over par, and these premiums would disappear if interest rates rise. Further, locking in income levels at today's low interest rates isn't necessarily a plus. Finally, with 10-year Treasury yields now down below 3%, going longer doesn't necessarily offer that much of a premium.
Searching for the best CD rates will earn you almost as much interest, without the volatility risk of bonds and with greater flexibility to reinvest if interest rates rise.
Posted in: Miscellaneous
April 23, 2009
The weekly survey of mortgage lenders conducted by Freddie Mac is reporting that the average rate on a shorter-term adjustable-rate mortgage is now higher than fixed mortgages of 15 or 30 years. This is the first time since Freddie Mac started the survey over 20 years ago that the mortgage rate curve has been inverse. Adjustable Rate Mortgages (ARM)'s are mortgages loans in which the interest rate can vary during the loan's term. Typically, these loans have a fixed interest rate for an initial period of years and then is reset based on current market conditions or the level of an index. The most popular ARMs reset based on the yields on U.S. Treasury securities. The advantage for borrowers has always been the ability to get a lower rate on a mortgage for the first period of years before the rate resets. That is until this week.
Freddie Mac reports the average on a 15-year fixed mortgage is 4.48% and the average on a 30-year fixed mortgage is 4.80%. These rates, for the first time, are below the average rates on the 5-year Treasury Indexed ARM (4.85%) and 1-year Treasury Indexed ARM (4.82%) offered by lenders. It may be very difficult for mortgage lenders to convince their customers to sign-up for higher rates on an ARM, when they can lock-in at a lower rate on a fixed mortgage. Borrowers using an ARM for their financing run the risk of inflation in the U.S. economy jumpstarting mortgages rates back over 6% or even 7%. To come out ahead, a borrower using an ARM for their loan would have to see fixed mortgage rates drop even further than their current historically low levels. The difference would also have to be enough to cover the costs of refinancing an ARM. That seems unlikely.