Since last spring the yields on U.S. Treasuries and corporate bonds as well have moved sharply higher – as an example the constant maturity yield on 10 year U.S. Treasuries moved from 1.64% on May Day to 2.75% on Labor Day. The result: fixed annuity yields are generally up quite a bit. By contrast, not only did the average bank one-year CD rate not go up over the summer, it actually declined (bankrate.com).
My belief is that increases in bank money market and CD rates will be modest in this rising rate cycle and not be as competitive as they were in past times. The main reason is the 2007-08 financial crises caused bank regulators to demand that banks keep higher reserves and higher equity so they’d be less leveraged. Indeed, in July the Federal Reserve proposed even more conservative standards for the eight largest banks. The problem is money kept in reserves and equity dilutes returns, meaning less money is available for lending and investing, and this lowers the income to the bank.
The other yield crimping factor is over the last 15 years banks added on a number of customer fees – some junk, some legitimate – and over the last increases is customers are not fleeing the banks. Quite the opposite, the amount in money market accounts is at record levels despite low rates.
In past cycles it was possible for bank customers to tighten one’s belt and wait for the next rising yield tide. This time the flood-tide of rising bank rates may be an extremely modest one, requiring those seeking higher yields to dip their toes in a different ocean.