Strong Treasury Auction Good for Mortgages, Not So Good for Savings Accounts

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.