One of the most sensitive indicators of interest rates appears
to have turned a corner. Does that mean rates on savings accounts
and other deposits could soon be headed upward?
Thirty-year Treasury bond yields are a good indicator of the
investor consensus about interest rates, both because they are
publicly traded and because they represent such a long-term
interest rate commitment. Recent months have seen 30-year Treasury
yields make a significant step higher. The question now is whether
this signals a new trend for interest rates in general.
Recent action in 30-year bonds
Thirty-year bond yields bottomed out in July 2012 at 2.45
percent. In early February they reached 3.21 percent, more than
three-quarters of a percentage point higher.
As the uncertainty about the election and the fiscal cliff have
cleared, the bond market has been able to respond to signs of
strength in the economy. The
early months of 2013
will be crucial in determining whether this trend can continue.
A limited response from savings accounts
So far, the response from savings accounts to rising bond yields
has been muted. The
most recent MoneyRates.com rate survey
found that savings account rates continued to decline in the fourth
quarter of 2012, albeit slightly. Money market rates, however,
increased just a little bit. In particular, for both savings
accounts and money market accounts, online banks increased rates
during the fourth quarter.
In short, rates on most savings accounts have not yet headed
higher, but there are starting to be signs that some banks are
willing to buck the trend.
In the big picture,
rates on savings accounts should eventually follow
bond market trends
, but they certainly don't move in lock-step with bond yields. In
particular, two things can cause bank rates to be left behind by a
change in bond yields:
The consensus can be wrong.
Bond yields react quickly to what investors in aggregate think is
the direction of interest rates, but investors have been known to
be wrong. Bankers setting rates on savings accounts have the
luxury of waiting awhile to see if they need to change, or if the
trend will come back to them.
Long bonds can be more concerned with if than
For a bond paying interest over 30 years, an investor simply
needs to get the idea that rates may be headed higher soon in
order to adjust yields accordingly. That investor mostly cares if
rates are headed higher, not when. Bankers, on the other hand,
can adjust savings account rates any time they want, so they tend
to wait until the need to adjust rates is immediate, rather than
having to anticipate the future.
It seems it is still too early for most bankers to feel they
need to follow bond yields higher. However, as the trend toward
higher yields approaches seven months and a full percentage point,
it may be too strong for even bankers to ignore.