Signals Point to Higher Bank Rates, but It May be a Rough Journey
Posted on January 3rd, 2010
Bond yields continued their march upward last week, and it should only be a matter of time before savings account rates, money market rates, and CD rates start to follow. However, that doesn’t mean it will all be smooth sailing ahead for bank rates.
The upward surge in bond yields during December could be attributed to any combination of three factors. All could help drive bank rates higher, but only one of the three is really good for depositors.
Those three drivers of higher interest rates are:
- Concern about inflation. With inflation re-establishing itself after a rare bout of deflation, it is only natural that all interest rates should adjust upward, to try to keep ahead of inflation. This may make bank rates look higher, but it would be something of an illusion because what depositors gain in interest they’d be losing in purchasing power because of inflation.
- Concern about the U.S. dollar. Rising Treasury bond yields mean Treasury bond prices are falling. Everyone knows the U.S. has a serious debt problem, but the hope — both here and abroad — is that it can be sorted out over time, in an orderly fashion. If instead investors start dumping Treasuries, look for another series of distruptions to the financial system.
- Economic optimism. The good news is that the rise in bond yields has been accompanied by a rise in the stock market, so this could all be a function of optimism about the U.S. economy. If so, it would mean more demand for capital — and that would result in people who have capital, such as bank depositors, getting paid more for the use of that capital.
So, keep your fingers crossed that the third factor proves dominant — but keep your eyes on the first two in the meantime.
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