Savings Account Rates: Where Are The High Returns?
We take a close look at high yield savings rates.
I’ve been wondering when this slump will end — I’m not just talking about the economy and the stock market; I’m actually referring to the low interest rates we’ve been experiencing. Not that it’s a bad thing…. it’s only tough if you’re a saver and are keeping your funds in safe bank accounts.
This is just one other phenomenon that has arrived as a result of the recession. In order to resuscitate the economy, the Federal Reserve is compelled to lower interest rates; I’ve seen this happen time and again in every recession I’ve seen (this is recession #3 for me), but rates have never been so low as it is today.
Misnomer: “High Returns” From Online Banks
According to a recent Bankrate survey, the average 6 month CD now returns 0.77%, which is the lowest recorded yield since 1984. Same goes for 5 year CDs which are now earning a paltry 2.16% on average. For better than average yields, check out this list of APYs from our favorite online banks and high interest accounts:
|
This is what constitutes “high yield” returns at this time! Just to emphasize how large an impact this slump has been to savers, it was a mere two years ago when HSBC Direct was offering 6% returns on its savings accounts. This is of course, in line with how interest rates have been behaving of late. Here is a historical view of interest rates showing just how we’re scraping the floor with the current yields. Not very good news for savers!
Image from theFinancials.com
Savings Account Rates: Why So Low?
So why is this happening? Let’s go through some reasons and explanations for this:
1. The Fed wants to stimulate the economy.
Well, we already know that the Fed is trying to encourage more lending and more people to jump into the markets. They want to get the economic juices flowing and hope to have money change hands and people to jump into investments where returns could be better. But with people still nervous about putting their money at risk, the stalemate continues with investors paralyzed about taking more risk with their money, and therefore keeping their funds ensconced in shorter term funds. Which leads us to the next point: the effects of the flight to safety.
2. Demand for safe accounts is high.
Because of the volatility going on in riskier investments such as the stock market, many investors have been spooked out of their stock portfolios and have rushed to safer online savings accounts and low risk bank products. They’d rather get small returns rather than lose big with stocks (as their thinking goes). Therefore, banks don’t feel the need to attract new customers by offering attractive rates.
3. Savings accounts just got safer.
The FDIC has increased guaranteed coverage limits to $250,000 per account. With this guarantee in place, more people feel secure about handing their money over to their banks and credit unions. Again — easy deposits don’t require higher yields.
4. Credit remains tight.
Because banks are not so interested in approving loans in this climate, they are also not that eager to attract deposits to support their business. Banks are acting more conservatively, and as a consequence, they’re also able to charge higher rates for loans. The equilibrium here has shifted in favor of banks, which are able to improve their loan business without really having to be too competitive.
Savings Account Rates: What’s Next?
So does this mean that we’re going to have to live with paltry savings rates until the economy recovers? And just how much longer is this environment going to last? From what I’ve been reading, it appears that unfortunately, rates may actually head even lower — that’s the prediction that analysts at Bankrate.com are making.
In particular, we are told to expect that yields for safe accounts with shorter maturities should head lower in the near term. Ugh! That means more pain for short term savers ahead. But here’s the thing, I’ve also been noticing that the accounts for longer term maturities are holding their own with more stable yields. In fact, the news here from Bankrate is that 5 year CDs are inching up higher from their national average of 2.15%. Does this mean that there is hope ahead?
Well, higher rates may be in our horizon, but for reasons that aren’t necessarily positive. There is talk of inflation ahead (thanks to our large government deficits), which can signal much higher rates in the future. Now we don’t want things to tip toward the other direction either — hyperinflation is not something we’d like to face!
Once the economy and the financial industry recover, we should begin to see these rates tick back up. The question is, when will that be? And if it happens, should we worry about inflation then? Savers may rejoice the higher APYs, but if it comes with higher prices across the board, then it won’t be much to celebrate either.
Savings Account Rates: Where Are The High Returns?
Related posts:
- TradeKing New Account $50 Bonus Online broker TradeKing.com has brought back their $50 sign-up bonus...
- WT Direct Extends $150 Promotion to August 15 Online bank WT Direct has extended the terms of their...
- The Trading Week Ahead: Aug 2 – Aug 7 The U.S. Non-Farm Payrolls and three interest rate announcements from...
Related posts brought to you by Yet Another Related Posts Plugin.
