Who wins in a credit crunch? Ask the person with cash

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The U.S. financial system crisis -– a.k.a. the credit crunch -- is one year old this month and showing signs of getting worse instead of better, as I noted in this post earlier Tuesday.

But then, ‘worse’ all depends on your perspective. This is a bad time to be a borrower, for sure. Mortgage rates are stuck around 6.5%, defying hopes that they would decline and spur more home buying.

The flip side, however, is that income-needy investors and savers are benefiting as interest rates in many credit-market sectors stay elevated or rise further.

And let’s not forget that there are millions of retirees out there who rely heavily on investment income to live. For them, the credit crunch is an opportunity rather than a problem. They aren’t reaping huge yields, but they’re doing better than they might otherwise.

Case in point: bank savings rates. They’ve been creeping higher in recent months even though the Federal Reserve has been holding its benchmark short-term rate at 2% since April 30.

Nationwide, the average one-year bank CD yield for a minimum balance of $25,000 was 2.56% on Tuesday, up from 2.37% on April 30, according to Informa Research Services. Shop around at bankrate.com and you can easily earn more than 4% on a one-year account.

CD yields have edged up in part because other short-term interest rates have defied the Fed’s attempts to pull them lower -- a sign of the financial system’s continuing case of nerves.

For example, U.S. banks that want to borrow for three months in the so-called LIBOR (London interbank offered rate) market now pay 2.81%. Normally, that three-month LIBOR rate would be just 0.15 to 0.20 of a point above the Fed’s benchmark rate, notes Christopher Rupkey, financial economist at Bank of Tokyo-Mitsubishi in New York.

The higher-than-normal LIBOR rate, in turn, forces companies and other big borrowers to pay more than they’d like on their short-term IOUs. That is helping to keep money market mutual fund yields higher than they otherwise would be, at an average of 1.84% currently, according to Money Fund Report newsletter.

Nervous investors’ demands to be paid more for their money also are costing mortgage-finance giants Fannie Mae and Freddie Mac, which must borrow to fund their purchases of home loans. Freddie Mac on Tuesday shelled out a higher-than-normal annualized yield of 4.17% on $3 billion of new five-year notes it sold.

As Fannie, Freddie and other lenders face higher borrowing costs, that’s putting a floor under mortgage rates. The average 30-year home loan rate as tracked by Freddie Mac has held at 6.52% for the last three weeks, even though the 10-year U.S. Treasury note yield has slipped from 4.10% to 3.83% in the period. In normal times, mortgage rates track the T-note yield.

Borrowers have every reason to hope that the credit crunch will ease soon. But investors and savers with cash to lend have their own good reasons to want the crunch to persist. And because they’re controlling capital in a money-starved financial system, they can call the shots. They want returns commensurate with the risks they figure they’re taking -- and in this economy, the risks don’t appear to be diminishing.