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Will the bond market rescue savings accounts?

March 16, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The Federal Reserve's optimistic outlook on the economy following its March 13 Federal Open Markets Committee meeting proved enough for the stock market to mount a steep late-day rally. But obscured behind the stock market headlines was the fact that bond market interest rates also made an impressive surge.

Interest rates on savings accounts, money market accounts, and other deposits are less sensitive to short-term fluctuations than bond market rates. However, the rally in bond rates, and the reasons behind it, is an optimistic sign for the future of savings and money market rates.

The rally in rates

In a sense, it is counter-intuitive to talk about a rally in interest rates, because rising bond yields result from a fall in bond prices; i.e., the opposite of a rally. Still, all of this is a sign of optimism about the economy. It marks the willingness of investors to leave the safe haven of U.S. Treasuries and move into riskier securities.

However, it will take more than a one-day rally in rates for any of this to affect savings accounts. 10-year Treasury rates rose by nearly 8 basis points on March 13, and by a total of 16 basis points for the past week. Looking longer-term, though, Treasury rates have moved mostly in a saw-toothed fashion so far in 2012, with every zig upward followed by a zag downward.

Are rates finally ready to break out of that pattern and make a sustained move higher? It all depends on the continuation of good economic news.

Higher interest rates -- with or without the Fed

Note that this discussion of higher rates does not center on the Federal Reserve, which is continuing its commitment to trying to keep rates low. Remember, though, that not even the Fed can compete with the buying power of the bond market. If that market decides rates are moving higher, all but very short-term Fed funds rates will be affected.

What you should do

While waiting to see if the rise in bond rates carries through to rates on savings accounts and other deposits, here are two things you should do:

  1. Keep your commitments short. If interest rates are poised for a move up, this could be a bad time for a commitment to a long-term CD.
  2. Keep a close eye on the marketplace. When rates start to move, not all banks will react at the same time. Even in a stagnant rate environment, the best savings accounts have offered rates well above the average, and those differences might become more pronounced in a more active rate environment.

It's tempting to say that the third thing to do is keep your fingers crossed. For nearly three years now, this economic recovery has been a series of false starts and setbacks. Rates on savings accounts and other deposits won't rise until positive economic momentum is firmly established, and that will take a continued run of good news without a major disappointment.

Your responses to ‘Will the bond market rescue savings accounts?’

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21 March 2012 at 9:49 pm

The good: In 2008 I was able to have my money invested in Traditional IRA with TIAA CREF with guaranteed capital and earnings of 5.25%. Each March the interest rate can change. The bad: No one tells you if there is a change. No letter to say your interest rate is the same or lowered. Mine went down to 4.1 for three years and now is at 3%. The ugly: I at least understood that I needed to call each March to inquire about the Traditional IRA interest rate.I also understand why the rates have been lowered and cannot complain on that. However imagine someone who has say, 1 million invested (nice round number) will now get maybe around 10k less a year and not know it. Not everyone watches their account and it seems to me the investment company has an obligation to tell each client of the change. Furthermore, I have had SO many administrative mistakes made with my account that it really worries me. Even 3% is hard to give up but I do worry what the next mistake will be.

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