Savers Still Waiting for Higher Yields

Despite the recent spike in long-term interest rates, savers craving relief from the lowest short-term yields in decades probably will have to wait until the second half of the year for better returns, experts warn.

With economic news improving and fears of terrorism subsiding, the yield on the benchmark 10-year Treasury note has climbed from 4.18% in November to 5.31% on Tuesday.

But the average yield on a taxable money market mutual fund slipped last week to a record-low 1.38% from 1.59% at the first of the year, according to rate-tracking firm IMoneyNet Inc. in Westborough, Mass.

Savers in short-term certificates of deposit are doing only slightly better, with rates on six-month CDs averaging 1.77%, compared with 1.88% at the start of the year.

Those yields have languished even as the yield on six-month Treasury bills has risen from 1.6% to 2% in recent weeks.

Treasury rates are set by the market. By contrast, banks are free to set their deposit rates at any level they choose. Analysts say a big move up in bank rates and other short-term yields will depend on the Federal Reserve, which seems to be in no hurry to raise its benchmark interest rate, now at 1.75%.

Savers could finally get a break in the second half of the year, said Greg McBride, an analyst with rate-tracking firm Bankrate.com.

If the economic revival continues, he said, the Fed could make several quick rate increases, pushing the yield on a six-month CD to the 2.5% range.

That would provide some relief to savers such as William Buchman of Los Angeles, who have seen their income shrink as a result of the Fed’s aggressive interest rate cuts last year.

“It just takes money away from people who know how to save to prop up people who haven’t done well in business,” Buchman, a retired Hughes Aircraft engineer, said of the Fed’s rate-cutting campaign. “The thrifty people are the ones who have been losing.”

Many investors sought the safety of bank accounts as the economy and stock market soured, lured by government-insured deposits or just a place to park funds while awaiting a turnaround.

Savings deposits, which include low-yielding bank money market accounts, have grown from less than $1.9 trillion at the beginning of 2001 to well over $2.3 trillion this year, Fed statistics show.

Investment in CDs declined somewhat during the same period, falling from more than $1 trillion to slightly below that level for “small” CDs--those of less than $100,000.

But demand remains strong for high-yielding CDs among retirees and other risk-averse investors, as Countrywide Credit Industries Inc., a Calabasas mortgage firm, discovered when it started offering other banking services Jan. 28.

To attract deposits to its first four bank locations, Countrywide offered above-average CD rates--for example, 3.2% on a one-year CD--and advertised the rates in local papers and on the Internet.

At the Glendale office, financial counselor Bob Bourgeois said CD investors, mostly seniors, began coming in from as far away as Bakersfield, Palmdale, Mission Viejo and Redlands as well as from nearby areas.

Most were well-versed in strategies for savers, Bourgeois said, such as buying CDs that mature at regularly spaced intervals.

This “laddering” allows savers regular access to part of their cash while keeping most of their funds in longer-term instruments, buffering them from the effect of falling rates.

Even though long-term CDs are paying more than at the end of last year, many rate watchers advise caution in buying them now.

Yields on five-year CDs, which averaged 4.24% last week, could rise significantly higher if the Fed raises rates late in the year.

“The danger is that you’re locking up your money for a long time at an interest rate that’s still very low,” McBride said.

He advises investors to bide their time by shopping for the best rate they can find on a six-month CD.

Two years ago, with interest rates near five-year highs, money funds were yielding an average 5.4%, “an enticing shelter from the tempest brewing in the stock market,” as McBride puts it.

Since stocks peaked in March 2000, total assets in money market mutual funds have grown by nearly $625 billion to top $2.2 trillion--even as yields dropped. But much of that money came not from conservative small investors but from big institutions seeking shelter for their funds as the stock market plunged.

With most stock indexes moving higher this year and the annualized dividend yield on the Standard & Poor’s index of 500 stocks at 1.36%--equaling the yield on many money market funds--more of those institutions will be cashing out of the funds, experts said.

“For an investor who had fled equities for the safety of cash on the sidelines and now is wondering whether the time is right to get back in, the answer to that question is definitely yes,” McBride believes.

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Creeping Up

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Parking Cash at the Bank

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A Sampling of Yields

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