For much of this year, many advisors, market strategists and money managers have been complaining that the Fed’s zero rate policy is hurting retirees and other savers who rely on risk-free investments or savings. But even when the Fed raises short-term rates, which is expected later this month barring any major economic or political crisis, those savers are not likely to collect more money, says Greg McBride, chief financial analyst at Bankrate.com.
Usually CD yields tend to rise along with Treasury yields but “this time is different from previous cycles,” explained McBride. “This time a lot of banks don’t have the incentive to boost CD yields… They’re flush with deposits [because] the American investors is very risk-averse.”
Banks don’t have to raise rates to attract more deposits because they already so many deposits, and if they did, it would cost them at a time when they want to boost margins. “Banks will likely use a rate hike as an opportunity to boost their margins, which have been under pressure with low rates,” said McBride.
In the meantime savers have been collecting more money recently since rates have been rising on the expectation that the Fed will finally get off zero and raise rates for the first time in more than nine years.
Three-month Treasury bills are paying 29 basis points, or 0.29%, since mid-October, when they were zero, and six-month bills are paying 0.57%, up 49 basis points, from mid-October. During that same time 10-year Treasury note yield rose to 2.23% from 1.99%.
While savers can’t expect to earn more income after the Fed hikes rates, borrowers can expect to pay more on loans, according to McBride.
Mortgage rates, which have been rising in anticipation of a Fed rate hike, will rise further once the Fed makes its first move as the market anticipates more rate hikes, according to McBride. An average 30-year fixed mortgage with no points now carries a 4.01% rate, said McBride.
Home equity lines of credit and credit card rates will increase lockstep with Fed rate increases within one to two statement cycles, said McBride.
He advises borrowers to “insulate” themselves against higher rates by unloading variable rate debt: paying down credit card debt, refinancing adjustable rate mortgages into fixed rate loans and asking their lender so fix the interest rate on their HELOC.
McBride advises savers to favor shorter term maturity CDs that they can roll over into higher interest CDs as rates rise and online saving accounts which tend to pay higher interest than accounts at other banks. But rates can vary so “be sure to shop around,” said McBride.
He also cautions CD investors to be “very certain they can live without the money for the term of the CD” because early withdrawals can be very costly. A new Bankrate.com report found that89% of financial institutions will seize some principal of a CD that has been withdrawn early because the penalty for many CDS under 5 years maturity exceed the amount of interest earned.
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