A good friend of mine in money management who I ordinarily think very highly of told me this weekend that he likes the 15-year US Treasury bond. I’ve also seen this same endorsement of the longer term US Treasuries from money managers and other talking heads on CNBC and Bloomberg. With the recent move in interest rates, many have seen the appreciation in long bonds and preferred stock in a short period. They have begun espousing (and promoting) the idea that investors should be only in equities and bonds, and backing it with evidence that some Austrian government debt has increased by 50% this year as their long-term interest rates have turned sharply negative. Therefore, they suggest that you need to buy the 15-year US Treasury bond at 1.50% or the 30-year US Treasury bond at 2.00% or preferred stock wherever it is trading.
This advice is inappropriate for every individual investor, and everyone espousing it needs to take a bond pricing class. They are widely offered in MBA programs and I learned a lot from mine at Columbia some 20 years + ago. Without going into all of the details, let me just say that if longer term US Treasuries go back to 3%, you will experience a 30 to 35% loss in the value of any Treasury instrument with a duration over 15 years and any preferred equity instrument (these have infinite duration). It will be instant and you will not know what hit you.
Europe has negative interest rates. The US does not. This does not mean that the US will have negative interest rates in the near future or ever. It is more likely that Beyond Meat will completely replace meat in the near future and I do not think that is going to happen.
Now, savings and CDs may not be as sexy as equities (which you may want to have exposure to), but at this point in the cycle they are a whole lot safer and more sexy than long bonds or preferred stock (which you absolutely should not be buying).
It is the end of the summer and Labor Day is upon us. It is a nice time of the year. Unfortunately, conservative savers this year are faced with a dilemma of declining savings rates ahead of a Federal Reserve meeting in September where the Fed could lower as much as 50 basis points as Powell and the other Fed governors give into Presidential harassment. There is also the possibility that the Fed could focus on the economy and the continued strong stock market and raise rates back to a 2.25% to 2.50% range that it was at before their most recent cut on July 31.
It is unfortunate that so many major online banks have been so hasty to cut online savings rates. We still, however, see some banks withcompelling rates. These generally fit into two categories.
First, our savings table shows that there are some online banks that have held rates firm. Popular Direct and My Savings Direct, a division of Emigrant Bank, are still offering 2.55% and 2.40% on savings as of today. CIT Bank is more well recognized and is still offering 2.30% on balances over $25,000. While any of these rates could fall at any time, banks that hold their rates constant at what may be the beginning of a cycle of rate declines often signal a hesitancy to reduce rates and risk losing deposits.
Second are those new entrants to the online savings game. Just within the last two months, we’ve seen launches of Brio Direct and Fitness Bank. The reviews on these banks show that there are real issues (we’ve actually removed Fitness Bank from our tables because their limitations make it a difficult choice for all but those who are depositing very small amounts). But, new entrants can often be eager to gain a foothold in the online savings market and are, therefore, particularly reluctant to reduce rates ahead of a prospective Fed cut (and even often late to reduce after a Fed cut). That having been said, Fitness Bank did reduce the rate for those customers in its most active tier from 3.00% to 2.75% APY today.
Those who are particularly anxious about a large and unnecessary decline in the Fed funds rates really need to look outside of savings to protect their assets. Short-term CD rates are firm, but will decline if the Fed actually cuts by 50 basis points. On a one-year CD, you can still get rates around 2.40% to 2.50% which is not that bad especially considering the fact that when expectations were quite different in February and March, these rates never got above 2.85%. We strongly recommend that depositors only use one-year CDs that have early withdrawal penalties of 3 months or less. Ally Bank’s early withdrawal penalty on one-year CDs is only 2 months and CIBC Bank’s is only 1 month. Low early withdrawal penalties can protect you if you need your assets for an emergency or an unexpected large purchase. They will also protect you from the unlikely event that all this craziness ends and the Fed resumes the course that Powell originally laid out in 2017 and 2018.
It is August and that means that you should be at the beach. While you are there, we suggest you draw a line in the sand.
Last week, the Federal Reserve moved to lower the Fed Funds rate to a range of 2.00% to 2.25%. In anticipation of the Fed move and throughout July, many well known online banks and branch banks lowered the rates they are offering on savings and money market accounts. In the several days since the Fed’s move, still others have followed suit.
However, there are some banks that have held their rates firm. We do not believe that you have to tolerate having your savings rate lowered, especially since the Federal Reserve indicated in its July 31 statement that it may be done lowering rates and that its next move may be to raise rates again.
As of today’s date, we could find 18 banks that are offering online savings and money market rates that are still above 2.30% APY in every state in the country. (Several others online banks have offerings above 2.30% APY that are not available nationally). Those who will not need access to their cash for five business days can also get rates at or above this level with Ally’s or Marcus’s No Penalty CDs. That is a total of 20 national offerings above 2.30%, and you may even find local rates at or above this level at banks and credit unions where you live.
With FDIC and NCUA limits at $250,000 for individuals and $500,000 for couples, it means that you can deposit up to $5 million as an individual and $10 million as a couple across these 20 banks and still be fully insured while earning 2.30%.
And, if you do not need complete liquidity, you can still earn even more than 2.30% in short term CDs.
For this reason, we recommend that your line in the sand be no lower than 2.30%. If your bank tries to lower what it is paying you below this level, we recommend that you look elsewhere.
