Personal Finance Blog By MoneyRates - July 2009
June 30, 2009
In past ages, describing the business model of a bank was simple: banks take deposits from savers, then make loans to borrowers.
In the brave new world of finance, though, the business models of banks, especially certain banks, has become much more complex.
Here are two areas of interest right now:
Banks Making Money by Trading (Yes, Including Derivatives)
Despite the warnings of Warren Buffett that derivatives are "weapons of mass financial destruction," the banking industry continues to traffic in--and profit from--these complex financial instruments.
In fact, during the first quarter of 2009, banks coralled $9.8 billion in revenue from trading derivatives and cash instruments.
Banks Losing Money on Credit Cards
Meanwhile, banks are taking a beating on credit cards. In May of 2009, credit card default rates hit 10.1 percent. Experts forecast that default rates will rise above 11 percent during 2010.
Not a Cause for Panic, Just a Call to Be Aware
There is no compelling reason for a conservative depositor to pull money from a bank savings account or CD just because that particular bank is making money trading derivatives and losing money on consumer credit.
However, there is a compelling reason for depositors to learn about the business models of the institutions they trust to take care of their cash. It's great to have FDIC insurance, but even better to never have to use it.
June 29, 2009
The U.S. Treasury bond market rallied sharply last week on the strength of a successful auction of new T-bonds. Rising bond prices means lower yields, which has a ripple effect on interest rates in general.
The successful auction calmed -- at least for the time being -- a couple of concerns which had been pushing yields higher in recent weeks. Inflation has been a growing concern for a number of reasons, perhaps most tangibly because of the sustained rise in oil prices this year. In addition, the mushrooming U.S. budget deficit has put downward pressure on the U.S. dollar. Both of those factors would tend to drive interest rates higher.
The recovery in Treasuries should help stem the recent rise in mortgage rates. That, of course, is good news for prospective borrowers. For depositors in savings accounts and other bank products, lower interest rates are not such good news. However, action in the Treasury markets affects these rates less directly than it does mortgage rates. Unlike mortgages, savings accounts are considered short-term interest rates. In addition, savings account rates are influenced by bank policies, and right now many banks are offering higher-than-market rates to attract depositors.
The real silver lining for those depositors will be if inflation does stay under wraps -- that would protect the purchasing power of principal and make the interest earned more worthwhile.
June 26, 2009
There is no such thing as a sure thing, especially when it comes to investing. Even CDs, among the safest of all places to put your money, can fall in value due to an external factor such as inflation.
However, the constant presence of risk should not prevent us from planning to minimize risk. Especially if you are approaching retirement, risk has lost its appeal. It's time to protect retirement savings.
Here are two potential threats that, while not worth panicking over, are certainly worth keeping an eye on.
China and Russia have both floated the idea of a "global super currency" that would replace the U.S. dollar as the global default currency. It is truly impossible to know what the exact effect of such a change would mean to American savers, but it's hard to imagine that the U.S. dollar would benefit.
Savers looking to counter this risk may want to consider maintaining some deposit accounts denominated in currencies other than the U.S. dollar.
The U.S. government has been spending a tremendous amount of cash over the past year and a half, trying to stop the U.S. from slipping into a deep economic depression. Estimates are that government commitments to economic assistance programs may reach up to $10 trillion.
Anytime such dollar figures are being bandied about, and meanwhile the value of gold has risen 25 percent in six months, people start to fear inflation.
Inflation is the worst nightmare of U.S. retirement savers because it directly lessens the buying power of money needed for retirement expenses. Savers looking to "hedge" against inflation may want to think about buying some gold-based investment.
June 24, 2009
The meetings of the Federal Reserve didn't used to be worthy of watching, but nowadays, the Fed is activist and consistently makes news.
The biggest news to come out of today's Fed meeting may have flown under the radar a bit in all the hullabaloo about Bernanke seeing yet more "green shoots" in the form of an improving or at least stabilizing economy.
This big news that seems to have gone relatively unnoticed? The Fed isn't going to keep throwing money at long-term Treasury bonds.
During the first half of the year, that is exactly what the Fed did, propping up the market for long-term Treasury bonds in an effort to keep mortgage rates low, so that everybody who could conceivably refinance their mortgage, would refinance their mortgage now. With foreclose filings exceeding 300,000 per month, that made sense.
But all those Fed greeenbacks flooding the Treasury bond market did another thing, too: the over-supply of money kept CD rates at artificially low levels. The best CD rates on a six month CD are currently in the 2.5 percent range, but the average rate for a six month CD is a full percentage point less than that, at 1.49 percent.
Now, though, the Fed is selling longer-term Treasury bonds. A $37 billion auction of five-year bonds brought a nice group of buyers, causing a slight uptick in five-year CD rates, whereas shorter-term CD rates actually fell.
Is it time to start "going long" on CD rates?
Not necessarily. But it is definitely time to start thinking about it.
Posted in: Miscellaneous
June 24, 2009
Depositors in bank accounts -- the people who aren't going bankrupt, aren't defaulting on their mortgages, and don't need a bailout -- have really gotten the short end of the stick over the past year or so. A recession naturally tends to drive interest rates down, but this has been exacerbated by Federal Reserve policies. The latter could be starting to change.
The Fed has sought to keep interest rates low to stimulate the economy. It did this not just by keeping its bank lending rate at barely above zero, but also by buying up massive amounts of Treasury and mortgage-backed bonds.
Though the recession is not yet over, the Fed is beginning to cast an eye a little further down the road, and worry about the inflationary impact of everything that's been done to revive the economy. Because of this, they may slow their bond market purchase program.
Letting the free market resume control of interest rates could result in those rates rising. This would dampen some of the economic stimulus, but if inflation perks up, it would drive interest rates higher anyway. From the Fed's standpoint, its better to have interest rates rise a little on their own than to be driven up by inflation. For depositors in money market and savings accounts or certificates of deposit, higher interest rates without inflation would be a clear win.