Despite Rate Cuts, Savers Not Diving Into Stocks, Bonds

For anyone with substantial sums in short-term savings certificates or money market mutual funds--and there are a lot of you out there--the Federal Reserve Board has once again become Public Enemy No. 1.

Courtesy of the Fed’s latest quarter-percentage-point reduction in its key short-term interest rates on Wednesday, CD and money market yields are headed lower soon.

The national average yield on six-month CDs is already at a two-year low of 4.67%, according to Bank Rate Monitor in North Palm Beach, Fla. Down 0.16 percentage point since the Fed’s Dec. 19 rate cut, that CD yield is all but guaranteed to continue falling in the wake of the Fed’s move this week, says Monitor Publisher Robert Heady.

Southland savers are faring better: A weekly survey of area bank yields by Bradshaw Financial Network shows that the average six-month CD yield was 5% as of Monday, significantly above the national average yield of 4.67%.

But the Southland average has fallen from 5.08% just before the Fed’s December rate cut, and it too is almost certainly headed down in the weeks ahead as banks adjust their deposit rates to match the quarter-percentage-point cut in the industry’s prime lending rate Wednesday.

Money market mutual fund owners also are earning lower yields. The average seven-day simple yield on taxable funds now is 5.01%, down from 5.15% on Jan. 1 and on course to fall below 5% next week, according to fund tracker IBC/Donoghue in Ashland, Mass. And banks, which consistently pay measly yields on their money market accounts, have even shaved that rate, to an average 2.82% currently.

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Once again it appears that conservative savers are paying for other people’s party: As rates drop and savers earn less interest, the stock market is booming. The Dow Jones industrial average is already up 5.6% this year, which is more than money fund owners can expect to earn all year, at current rates.

Yet so far savers aren’t repeating the massive exodus out of short-term accounts--and into stocks and bonds--that occurred in 1992 and 1993, the last time short rates plunged. Federal Reserve data show that the total in small CDs nationwide has remained virtually steady at $932 billion since last summer. Assets in regular savings accounts, such as passbooks, have actually surged $54 billion since then; money fund assets also have jumped.

Of course, people have continued to buy stocks all along, as evidenced by booming stock mutual fund purchases. Yet the CD, passbook and money fund numbers show that many Americans continue to amass assets in “liquid” accounts as well, even as rates fall.

Is that rational? Some Wall Streeters think so. Considering the spectacular gains in stocks last year and the strong rally in long-term bonds (and dive in yields), many individual investors may be worried that markets are overdue for a setback, says David Schroeder, manager of the Benham Treasury Note mutual fund in Mountain View, Calif.

“After 1995, I’d be a little nervous about adding risk to my portfolio,” Schroeder says. By building up their cash reserves, despite lower short-term yields, many investors may simply be hedging their bets on stocks and bonds, he says.

The action in the bond market lately is hinting that a hedge isn’t a bad idea. The yield on 30-year Treasury bonds has refused to decline in recent weeks with short-term yields. As a result, the “spread” between two-year Treasury note yields and 30-year T-bond yields now is the widest since late 1994: 4.92% compared with 6.07%.

Typically, that kind of spread, or “steep yield curve” in Wall Street lingo, indicates that investors expect the economy to pick up sooner than later, reversing interest rates’ downtrend.

Most economists argue that the bond market is wrong. Many fear that the economy is in fact on the verge of recession, which could cause interest rates to dive across the board.

For now, the good news for obstinate savers is that rates on short-term accounts remain well above their 1993-94 lows, when the six-month CD yield bottomed at 2.78%. By continuing to build their “cash” assets, some Americans seem to be saying that the greater risk today isn’t in earning 4% to 5% on CDs, but in diving headfirst into stock and bond markets with every last dime.

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Short-changed

Banks have been busy trimming savings rates since the Federal Reserve Board’s Dec. 19 interest-rate cut, and more cuts are in store. Average national yields: (see chart)

Source: Bank Rate Monitor