(Bloomberg) — You see Wall Street everywhere, interest rates are going up. For everyday savers: Not so much.
The two-year US Treasury yield had its biggest one-day jump in more than a decade last week, reaching 1.64%, a level unseen since late 2019 and up from 0.44% at the end of November. The US 10-year yield – a global lending benchmark – is above 2% for the first time since August 2019.
In mid-2019, Goldman Sachs Group Inc’s popular consumer bank Marcus was also offering a yield of more than 2% for individuals to park their cash in a high-yield savings account. In early 2020, at the time the Federal Reserve lowered interest rates three times, it was still promoting the rate to 2% on an 11-month, no-penalty certificate of deposit.
Rates are very low today, even though US yields have returned to pre-pandemic levels. Marcus’ savings rate of 0.5%, which he notes on his website, is higher than Bank of America Corp’s 0.04% or JPMorgan Chase & Co.’s 0.02%. While Goldman is in line with other high-yield peers such as Barclays Plc and Ally Bank, rarely has its average percentage yield fallen behind the ongoing rates in the $22.9 trillion U.S. Treasury market.
Online high-yield savings accounts gained popularity in recent years as a simple way for regular investors to keep their cash reserves liquid, while still generating returns better than accounts at the largest U.S. retail banks. During most of the pandemic recovery, such ultra-safe options have outperformed gains on broader stock-market indexes and other riskier assets.
But with the S&P 500 index down 7.7% so far this year and the tech-heavy Nasdaq 100 down nearly 13%, people may be looking for ways to protect their money from further losses—especially if risk-averse. Free rates they can earn to get ahead in their work.
However, even with interest rates rising sharply by bond traders, experts warn that this will be a slow process at banks, even those who have “triggered” their customers. High yield”.
Kevin Caron, portfolio manager at Washington Crossing, said banks are not as desperate as they once were for new deposits. The pandemic-era fiscal stimulus pumped so much cash into the financial system that, along with post-2008 banking regulations, it hit the balance sheets of some of the biggest US lenders. Last year, JPMorgan chief executive Jamie Dimon said there was a risk it would have to return the deposit.
This gives institutions like Marcus and other online banks the advantage of keeping their interest rates on hold at least until the Fed actually raises its key short-term benchmark.
“When the Fed lowers rates, it’s going to put pressure on banks to raise rates,” Caron said. “But banks have a lot of deposits, so you might get some gaps.”
In addition, banks are playing the “chicken game” where they are trying to keep their rates low to avoid overpaying in interest, said Mike Bailey, research director at FBB Capital Partners.
“After the first bank breaks through the pack and raises rates, the game is on and you get other banks on the bandwagon to make sure they don’t lose market share,” he said.
When the Fed raised interest rates in 2017 and 2018, online bank accounts gradually began to offer higher returns, and then gradually cut them back as central bank policy eased.
In the Fed’s previous tight cycle, however, inflation was barely above its 2% target, allowing central bankers to gradually increase rates by about 25 basis points each quarter. Such a prediction is hardly given this time around: the consumer price index rose 7.5% in January from a year earlier, the fastest pace since 1982. In light of that data, St. Louis Fed Chairman James Bullard said he could see the central bank need to raise interest rates by 100 basis points in the first half of 2022 to ease inflationary pressures.
Certainly, other Fed officials have expressed a more optimistic attitude. And there is still skepticism among investors that the central bank, which has long been seen as working to support financial markets, will show such urgency to tighten monetary policy. This could be another reason why online banks have been slow to react to market volatility of rates.
“While rates are likely to rise this year, it may move at a slower pace than the Fed and the market,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “It’s still going to be a tough income environment for savers.”
For everyday investors looking to capitalize on higher US returns, the options aren’t as simple as a savings account. Some online brokerages offer a way to purchase Treasury securities through the secondary market, while the government has its own electronic market, TreasuryDirect. Exchange-traded bond funds, a popular choice among retail investors, may decline in value.
Especially when it comes to putting money into a product, timing is everything. But overthinking — or doing nothing with your savings — could be worse, given that cash is losing its purchasing power after adjusting for inflation above 7%.
“It goes back to a balanced portfolio and keeps cash there for short-term needs and maximizes it,” Miskin said. “You have to be really thoughtful in the financial planning element and invest for the capital that has a longer term.”
To contact the author of this story:
Claire Ballantine in New York [email protected]