Author: David Olnick, Investment Executive, All Seasons Wealth
Is your bank paying you a competitive rate on your deposits? In today’s rate environment chances are they are not.
Rates have been rising at the fastest rate in years as the FED moves aggressively to reign in current high inflation rates. Three consecutive 75 basis point rate hikes is unheard of and considering Wednesday’s release of a “still hot” CPI report, the odds now highly favor a 4th consecutive 75 basis point rate increase, taking the Federal Funds rate towards 4.00% – 4.25% (see chart below – sourced from Bloomberg LLC). The most recent indicators on where the “terminal rate” may lie is around 4.50%. However, some are now suggesting the possibility of a number closer to 5.00%.
Short-term rates such as bank deposit rates (money market and checking accounts), short-term treasury bills, short-term certificates of deposits, SOFR rates etc. are all directly affected by what the FED does. Longer-term rates not so much.
So why are so many banks still paying rates on their deposits of between 1.00% – 2.00% or possibly even lower when the FED has raised rates to 3.25% – 3.50%? Because that’s how banks operate. When the FED raises rates, banks will raise their lending rates almost immediately while raising deposit/savings/CD rates will be much longer and drawn out. The same thing happens when the FED cuts rates. Deposit/savings/CD rates will be cut almost immediately while loan rates will come down at a slower pace. It is all about NIM (Net Interest Margin). The bread and butter of a bank is its NIM.
One of the advantages of bank money market/savings accounts is the daily liquidity those provide along with some measure of FDIC insurance. However, for those investors, be they individual or commercial, who may not need “daily liquidity” there are now a host of very intriguing alternatives to pick up substantial yield on those excess funds. The most obvious example are short-term U.S. treasury bills and short-term government agency notes. The U.S. treasury auctions 3 month, 6 month and 1 year treasury bills regularly. However, they will also auction “cash management” t-bills which could be as short as 7 or 14 days in maturity. An investor can purchase a treasury bill with any maturity they want that is 1 year or less. A 1 year t-bill issued 51 weeks ago still has 1 week left to maturity and can be purchased as a 1 week t-bill. Another advantage of treasury bills is that the interest earned on those is exempt from state income taxes (NOT exempt from federal income taxes).
As of this writing, 10/14/22, treasury bill yields are as follows:
14 Day: 2.60%
30 Day: 3.10%
90 Day: 3.61%
6 Month: 4.30%
1 Year: 4.40%
(These rates/yields are subject to change without notice)
Bankers will not generally volunteer to those clients with “substantial” deposits the option of a higher rate on a “non-deposit investment” (such as a U.S. treasury) because that means those funds would leave the bank’s balance sheet (which bankers don’t like). However, many clients maintain very substantial deposits in cash accounts which tend to remain “sticky” and simply sit there for long periods of time. This memo is targeted primarily towards those types of investors. If “daily liquidity” is not a necessity and a short-term investment will not disrupt liquidity needs then, if the alternative investment provides potentially twice the return (or more) than a “cash” account, that merits consideration. Those opportunities are now available. An increase in return of 1.00% on $1,000,000.00 annualized = $10,000.00. Think about that….
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
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