CLIP Index update: March 2014 Senior Financial Analyst, CFA
April 14, 2014

They were not big changes, but both mortgage rates and CD rates moved against consumers during the month of March. This is noteworthy because it involves those interest rates moving in opposite directions, with mortgage loans becoming more expensive and bank deposits becoming less rewarding.

The CLIP Index increased by 5 basis points in March, to 4.29 percent. Since the CLIP Index measures how much more interest banks charge mortgage customers to borrow than they give CD customers for depositing money, an increase in the CLIP Index represents a net disadvantage for consumers.

March 2014 CLIP Index

Interest rate movements in March

Average one-month CD rates declined by 1 basis point during March, to 0.05 percent. Meanwhile, the average mortgage rate for the month increased by 4 basis points, to 4.34 percent.

The movement in mortgage rates during March may be more significant than the change in monthly averages would suggest, because rates ended the month in a rising trend. After dropping to 4.28 percent in the first week of March, 30-year fixed mortgage rates had climbed to 4.40 percent by the end of the month.

The bottom line is that mortgage borrowing got more expensive in March, which is the direction things have been generally headed in the past year. And, while deposit rates are so close to zero they do not have far to fall, one-month CD rates still managed to inch down last month, making March doubly costly to consumers.

Why are rates moving in opposite directions?

It is generally accepted that signs of economic strength are likely to push interest rates up, and signs of weakness will make them more likely to fall. So what sort of economic developments could cause mortgage rates and CD rates to move in opposite directions?

The answer lies in the fact that fixed mortgage rates are set for the long-term, while one-month CD rates can readjust frequently. Here are two economic factors that may have helped push long-term and short-term rates in opposite directions:

  1. Growth is not dead, but it has taken a step back. Though the economic recovery seems to still have some staying power, disappointing employment reports in December and January showed a definite pause in the pace of progress. The overall impression is that the economy is still growing, but will take some time to rebuild the momentum it had gained throughout most of last year. That difference between the long-term outlook and near-term conditions helps explain the different directions long-term and short-term interest rates have taken.
  2. Fed policy toward long-term and short-term interest rates differs. The Fed has been tapering back its quantitative easing program -- a program designed to push long-term rates down. At the same time, the Fed has taken pains to signal that it will keep short-rates low for the foreseeable future. That is one more reason for short-term and long-term rates moving in opposite directions.

Between rising mortgage rates and falling CD rates, the CLIP Index has risen by just over a full percentage point in the last 15 months. With banking conditions going against them, it has never been more important for consumers to check competing mortgage quotes and stay informed about where to find the best CD rates.

About the CLIP Index

The Consumer Lost Interest Percentage (CLIP) Index measures how much interest consumers are currently losing in the gap between mortgage and deposit rates. To create this index, compiled 30-year mortgage rates and one-month CD rates going back to 1971. This yields more than 40 years of history to help put the current gap between mortgage and deposit rates in perspective.

It makes sense that mortgage rates exceed the interest rates paid on short-term deposits such as CDs, savings and money market accounts. Mortgages represent longer commitments and thus more risk, plus banks deserve to make a profit on their activities. How much profit is fair is a subjective question, but by measuring the size of the gap between mortgage rates and deposit rates over time, you can tell whether that gap is currently above or below average.

The graph on the below represents the arc of the CLIP Index, measured in annual averages, from 1971 to 2013.

CLIP Index: 1971 through 2013 updates the CLIP Index every month to gauge what kind of deal banks are offering their customers. This gives consumers an opportunity to better understand today's banking landscape -- and how to get the most from it.

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