Decades-Low Interest Rates Take a Toll on Savers
The bond market rout that sent mortgage loan rates soaring during the last week was of little help to savers, who continue to suffer the worst savings yields in decades.
Short-term savings rates have continued to fall, and experts saw little relief on the horizon. Longer-term yields crept up slightly, but remain at historically low levels.
“Short-term market rates are still going down, although they are starting to stabilize,” said Peter Crane, vice president and managing editor at IMoneyNet Inc., a Westborough, Mass.-based rate tracking firm. “Savings rates won’t move up until the Fed moves them up.”
The Federal Reserve has slashed interest rates 10 times since January in an effort to revive the nation’s slumping economy. Some recent economic news had experts mixed on whether the rate cuts have come to an end or would continue. However, few expect the Fed to boost rates any time soon.
Interest rate cuts help companies and indebted consumers by lowering their borrowing costs. However, they’re tough on savers--many of whom are seniors living on fixed incomes--who have seen yields plummet on everything from money market accounts to certificates of deposit.
Six-month certificates of deposit, which paid 5.29% a year ago, were returning just 2.01% last week, said Greg McBride, financial analyst with Bankrate.com, a rate tracking firm based in West Palm Beach, Fla. Yields on one-year CDs have fallen from 5.55% to 2.17% during the same period.
“It’s basically [a transfer of money] from people who are thrifty and save to people who are more spendthrift,” said William Buchman, a Los Angeles area retiree.
Although yields on 10-year Treasuries have soared over the last two weeks--derailing many consumers’ plans to refinance their mortgages as mortgage loan rates are tied to yields on these securities--the impact on longer-term savings rates has been negligible. Five-year certificates of deposit were yielding an average of 3.87% last week, up only incrementally from the 3.84% yield of a week ago, McBride said.
Some retirees said they’ve been spared the pain of dropping rates thanks to seasoned investment strategies, such as “laddering” fixed-income portfolios.
Laddering involves buying fixed-income investments that mature at different times. For instance, an investor may have accounts that mature in 2001, 2002 and 2003--or even accounts that mature each month. That allows the investor ready access to a portion of their cash, but it keeps the bulk of their investments in longer-term instruments, which saves them from having to reinvest their savings at low rates when rates start to fall.
“I’ve been fairly lucky,” said Bernard Schweitzer, a 68-year-old Los Angeles engineer. “I’m in longer-term CDs and bonds and they all mature at different times. Even if I have to reinvest money at lower rates, it will be some small fraction of my total portfolio.”
Starting such a ladder now would not be advisable, though, McBride said.
“Longer-term rates have stabilized, but you don’t want to be buying long-term CDs now,” he said. “You would be locking in record-low yields.”
Unfortunately, McBride added, investors cannot get better yields in the current market without substantially boosting their investment risk.
Investments in real estate investment trusts, high-yield bonds, preferred stocks and high-dividend stocks provide more generous returns, investment professionals said. But each poses substantially greater risk to the value of an investor’s principal than insured savings deposits and bonds backed by the U.S. Treasury.
Nonetheless, some seniors have taken to these investments in a search for income. One Southern California retiree, for example, said he had been buying stock in low-profile companies that pay high dividends.
This investor, who asked not to be named, said he is enjoying dividend yields of 7% and 8%. But there’s the risk that the firms he has invested in will cut their dividends, which aren’t guaranteed. A dividend cut would not only shave this investor’s income stream, it would probably damage the firm’s stock price and thus cut the value of his principal investment.
Others, unwilling to take greater risks, are simply suffering and looking for options.
“If you know of any safe havens for savers, I’d sure like to know about them,” Buchman said. “With interest rates going down, it is really hard on the poor saver.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Savings Slump
(tabular data not included)
