Don't Get Too Used to Higher Bank Deposit Rates
20 May 2019 - 4:58AM
Dow Jones News
By Allison Prang
The "good times" for bank depositors may not last much
longer.
Investors increasingly think the Federal Reserve is on course to
cut interest rates at least once this year. That makes it likely
banks could start to reverse course on deposit rates, which while
still low by historical standards have climbed over the past two
years.
Growth in payouts to savers has already begun to stall in some
deposit categories. The national average rate for a one-year
certificate of deposit, for example, has risen just 0.09 percentage
point, to 1.01%, this year through May, according to Bankrate.com.
In 2018, that same rate more than doubled.
The average rate on a five-year CD fell by 0.05 percentage point
in May from April, the Bankrate.com data showed.
Meanwhile, a recent report from Piper Jaffray, which looked at a
range of deposit products from about 120 banks, showed that more
products' deposit rates were falling than rising. Those banks
lowered the rates they pay on deposits for 87 different products in
the first quarter compared with 18 products for the same quarter a
year ago, based on data from DepositAccounts.com. They raised rates
on 149 different products in the quarter, compared with 180 a year
earlier.
The result: An end could be at hand for the somewhat brief
period, starting around two years ago, when depositors finally
began earning more than desultory interest on their money. Paltry
payouts until then were the result of the Fed's near-zero
interest-rate policies, enacted in the wake of the financial
crisis.
While big banks generally have kept payouts low, savers over the
past year or so have been able to tap 2%-plus yields for savings
accounts at online banks and certificate of deposit rates that in
some cases topped 3%, even for shorter maturities. That occurred as
the Fed between late 2015 and late 2018 increased short-term rates
nine times -- bringing the fed-funds rate to a level of between
2.25% and 2.5% -- and the yield on the 10-year U.S. Treasury to
around 3.25% last fall.
Since then, though, the Fed has put future rate increases on
hold and longer-term yields have steadily declined in 2019; the
yield on the 10-year Treasury has fallen to around 2.4%.
Adding to the possibility deposit rates will start to decline,
especially if the Fed cuts rates: Bank profits are likely to come
under pressure from an inversion of the yield curve, or the
difference between short- and long-term rates. Banks can offset
that pressure by controlling their deposit costs, Piper Jaffray
managing director Matthew Breese said.
"If you're borrowing, you're excited," David Turner, Regions
Financial Corp. finance chief, said in a recent interview. "If
you're a saver...you're less excited."
Banks have said they are already under less pressure to pay up
for deposits.
On his bank's first-quarter earnings call, M&T Bank Corp.
finance chief Darren King said the movement of deposit rates slowed
in the first quarter given "that there was a little bit less
competitive pressure on deposit pricing in any given category."
Banks also don't feel under pressure to keep deposits flowing in
at a brisk pace because loan growth isn't particularly strong, Mr.
King said in an interview.
Some in the industry also say depositors are conditioned to
superlow payouts from postcrisis years when cash earned next to
nothing. That makes them less likely to shop around for a better
rate if deposit payouts start rising or even fall.
"I think customers are less in tune with the ability to get a
return on their deposits," Kevin Barker, senior research analyst
for Piper Jaffray, said.
Ultimately, what banks do with deposit rates will depend in
large part on how monetary policy plays out over the remainder of
the year. As of May 17, fed-funds futures showed the market pricing
in about a 72% chance of at least one interest-rate cut by the end
of 2019, according to CME Group.
At the same time, a small but growing number of investors expect
the Fed could cut rates more than once in 2019, while the
probability of the central bank standing pat on rates has steadily
declined this spring.
Write to Allison Prang at allison.prang@wsj.com
(END) Dow Jones Newswires
May 19, 2019 14:43 ET (18:43 GMT)
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