Personal Finance Blog By MoneyRates - December 2009
December 31, 2009
John Tamny wrote a terrific column the other day at Forbes.com noting the vital role that holders of CDs, money market accounts, and savings accounts will play as the U.S. economy recovers from its presently poor state.
Contrary to popular wisdom that sees consumer spending as the best thing for the economy, therefore every time consumer spending goes down that's bad for the economy, Tamny points out that people who save money are actually spurring the economy by saving money.
The logic of Tamny's argument is simple but compelling:
When you save money in CDs, money market accounts, and savings accounts, you are making the capital in those accounts available for borrowing--businesses and homeowners, for example, can borrow more when banks have more money on deposit to lend. That creates growth.
Moreover, the economy benefits in the long run from people having money saved and not simply drowning in debt and living from paycheck to paycheck. The money in those savings accounts can also be used to buy future products.
It is unfortunate that Mr. Tamny's point of view is not more widely circulated in our national media. Because consumer spending accounts for 70% of American GDP, people who don't spend everything they make are sometimes made to feel that they are somehow hurting the economy by saving rather than spending.
It's not true. Savers do more than their fair share to stimulate the American economy.
December 30, 2009
It's not a disaster, but it is a discouraging note if you've been watching and waiting for savings account rates, money market rates, and CD rates to improve.
After five straight months of increases, the S&P Case-Shiller home price index was reported yesterday to be flat for the month of October. The S&P Case-Shiller index is focused on prices of existing, single-family homes.
A recovery in housing is considered to be a key for economic recovery in general. You can consider residential real estate prices both a cause and an effect of other economic factors. They are the effect of the overall state of household finances -- income, debt levels, etc. As these factors strengthen, foreclosures slow down and housing prices stabilize. Thus, housing is a reflection of the underlying strength of the U.S. consumer.
Of course, housing has also been the cause of many of the woes that have plagued the banking sector. Thus, further trouble in the housing market could precipitate a further round of problems for banks.
In terms of bank rates, a slowdown in the housing recovery is bad as both an effect and a cause. As an effect of economic weakness, softness in housing is a sign that the strengthening economic demand which would drive bank rates higher may be delayed. As a potential cause of problems for banks, a relapse in the housing market could lead to another round of concerns about the safety of bank deposits.
Certainly, in economics one month does not constitute a trend. However, what's slightly troubling about the slowing of the housing recovery is that the S&P Case-Shiller index is based on a three-month moving average. Thus, this piece of bad news may have more substance than meets the eye.
December 29, 2009
The U.S. government is scheduled to sell a total of $118 billion in U.S. Treasury bonds this week in order to finance government spending. If you are looking for CD rates to rise, Treasury bond auctions matter to you.
The first auction took place yesterday, in the form of $44 billion in two year notes. Attendees of the auction noted that demand was "lackluster." Also notable was the fact that the percentage of foreign buyers dropped, but the percentage of American money managers buying was up.
Who buys Treasury bonds and at what prices matters to CD rates because CD rates paid by banks are, generally speaking, closely tied to interest rates paid by the government. After all, banks that issue CDs are essentially competing for investors with the government.
Conservative investors frequently hold both Treasury bonds and CDs in their portfolios, making this natural correlation even more important for individual investors who hold both asset types.
If demand for Treasury bonds falls, the government is forced to pay a higher interest rate in order to entice investors to buy the government debt.
Likewise, if demand for CDs falls, banks are forced to pay higher interest rates to attract depositors.
It's the law of supply and demand in action--and as there is plenty of supply hitting the market this week, it will be interesting to see how demand stacks up.
Posted in: Miscellaneous
December 28, 2009
The month of December has seen significant upward movement in Treasury bond yields, with some rates moving up by as much as 50 basis points in the first four weeks of the month. So when will this start to influence savings account rates, money market rates, and CD rates?
Certainly, with many bank rates languishing around the 1% mark, a 50 basis point jump would be a welcome addition. While bank rates aren't obliged to follow every move of the Treasury market, Treasury yields are often a more immediate indicator of changing trends than Federal Reserve interest rate policies. The more Treasury yields move, the more it indicates strong conviction that underlying economic forces have changed. In turn, this also means a greater likelihood that both bank rates and Fed policies will follow along.
If you are waiting to see all of this trickle down to bank rates, here are three things to watch.
- Look for movement at the short end of the Treasury curve. Most of the action so far has been in long Treasuries, but bank rates have more in common with short-term Treasuries. When those rates start to move appreciably, it could be a sign that bank rates won't be long in following.
- Follow savings and money market accounts especially. Longer-term CDs may seem to have more in common with the longer Treasuries that have seen the greatest rise in yields, but until new trends are well-established, banks may be slowest to change rates that represent a long-term commitment.
- Watch individual banks as well as averages. Banks will respond at different times, so besides watching how average rates change, be sure to follow Money-Rates.com for movements in individual bank rates, because these will be the first to change.
December 25, 2009
For conservative investors who are patiently or not so patiently awaiting news of higher CD rates, the news to watch for in the new year of 2010 will be good economic reports regarding jobs, housing, and GDP growth.
The awful economic conditions of the last two years have been the cause of the Federal Reserve keeping the fed funds rate at historic lows. This key short-term interest rate, in turn, has kept CD rates historically low.
As 2010 gets going, it may be time to let interest rates rise a bit...if the economic reports show that the economy is improving.
In terms of jobs reports, the Non-Farm Payrolls Report is the star of the show. If employment starts to pick up according to those numbers, inflation will become an instant worry. That could lead to an interest rate hike.
Housing, as noted by Richard Barrington, is the other giant elephant in the room. Sales of new homes came in lower than expected this week, and that drove the value of the dollar lower through the implication that the economic recovery isn't yet as robust as desired.
GDP growth is the third bit of news that CD holders should be aware of. If fourth quarter GDP growth comes in at 4 percent or more, the fed funds rate--and your CD rates with them--could be headed higher sooner rather than later.