Most Bank Rates Are On the Losing End of a Steep Yield Curve

The yield curve, which is a line plotting the yields of income securities from short-term to long-term, is steeper than it has been since the 1990s. Unfortunately, most bank rates are on the wrong end of that curve, and this represents yet another way that depositors are paying for the recovery of the banking sector.

Short-term U.S. Treasuries are still yielding close to nothing, while 30-year Treasuries are up over 4.5%. The spread between the two is what makes the yield curve steep. Unfortunately, savings account rates and money market rates are based primarily on the short-term end of the yield curve -- the part that is barely above zero. CD rates are more of a mixed bag, depending on the length of the CD, but for the most part CD rates would fall along the lower end of the yield curve as well.

This has been a bonanza for the banking industry. They can pay depositors virtually nothing for capital, and then invest that capital at significantly higher rates in the bond market. With the yield curve steep, banks can make a nice profit on deposited assets without taking the risk of lending them out. However, banking regulators issued a warning last month that this profit model is sensitive to a rise in short-term rates.

What the regulators realize is that the short-end of the yield curve is strongly influenced by Federal Reserve policies, while the long end is set by a freely-traded market. The short-end has been kept artificially low to help stimulate the economy -- and to bail out the banks. This artificially steep yield curve can't be sustained forever, but in the meantime, depositors at the short end of the yield curve are getting the short end of the stick.

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