CLIP Index update: June 2014 Senior Financial Analyst, CFA
July 09, 2014

Banking conditions are the best they have been for consumers in 11 months, according to the CLIP Index, but an even rarer glimmer of hope has appeared for beleaguered depositors.

The CLIP Index, which compares the cost to consumers of borrowing money to the interest they earn by depositing it, fell to its lowest level in 11 months in June. The lower the CLIP Index, the better a deal consumers overall are getting from their banks, when you take into account both borrowers and depositors.

Recent economic developments suggest there are more changes to come, though it remains unclear whether the CLIP Index will continue to contract.

Mortgages and CD rates move in opposite directions

The CLIP Index declined by four basis points in June, to 4.10 percent. That is the lowest the CLIP Index has been since it was 4.01 percent in June of last year.

The CLIP Index narrowed because mortgage rates fell and CD rates rose. Thirty-year mortgage rates fell for the second consecutive month, but what was more rare was the rise in CD rates. One-month CD rates rose for the first time since late 2009. Granted, it was only by 1 basis point, but for depositors who have seen bank rates all but disappear, any sign that rates may be headed back up is welcome news.

While a lower CLIP rate represents improving banking conditions for consumers, the CLIP Index is still at unusually high levels. Going back to the early 1970s, the average CLIP rate has been 2.86 percent -- more than a point below June's level of 4.10 percent.

What's next?

The changes affecting the CLIP index seem at odds with the broader economic environment for three reasons:

  1. Inflation should be pushing rates higher. The inflation rate has risen in each of the past three months, with the most recent monthly figure (for May) actually representing a higher annual rate than today's mortgage rates. Since banks do not want to lend money for less than the rate of inflation, this rising price trend should normally mean rising interest rates. While CD rates did tick up in June, that 1 basis point rise was a fraction of the recent rise in inflation.
  2. Stronger economic growth should also influence rates higher. Healthy employment growth over the past several months should also have an upward influence on interest rates, so it is somewhat strange to see mortgage rates continuing to fall.
  3. Based on Fed policy, the spread between long and short rates should be widening. Not only does the economic environment suggest that rates should be rising, but the Fed has been backing away from its program to drive long-term rates down, while pledging to keep short-term rates low. That means the spread between long-term and short-term rates should be widening. Instead, the spread between long-term mortgage rates and short-term CD rates has narrowed by 30 basis points so far this year.

For anyone interested in a mortgage loan, whether it is for a new purchase or refinancing, these factors mean you would be wise to act quickly, while mortgage rates are still low. For depositors stuck at the low end of an unusually wide interest rate spread, the advice is somewhat the opposite -- patience may be necessary if you are waiting for higher deposit 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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