The Ignorant Investor
Ignorance Can't Stand in the Way of My OpinionTuesday, October 25, 2005
Higher Bank Rates Aren't "Fabulous News"- They're Just News
I've never made any secret over my ignorance on many matters of economics or the more complex aspects of investing or trading, but I feel like this Wall Street Journal reporter may have missed something as he writes "Yield-Starved Investors Get a Break" in today's edition:
Put aside the inappropriate comparison of performance with stocks, real estate and junk bonds and focus on the idea that better rates are bringing a smile to the faces of savers. A year ago when yields were at .86%, inflation was in the 1-2% range. Now yields on bank accounts are up to 3.18%, but inflation is way up, too. Notice the correlation? As inflation rises, yields usually do, too. This is because banks have to compensate lenders (which, essentially, is what you are when you make a 'deposit') for the falling purchasing power of their money by offering a higher yield.
If I've got this right, the higher rates aren't "fabulous news" for investors. When inflation is taken into account, investors aren't making any more this year than they were last year. It's more like, "Hey- I'm pretty much where I've always been" news. Nothing to feel bad about, but it doesn't make me smile.
Many riskier investments got blown away by last month's hurricanes and the attendant fears of inflation, economic weakness and higher interest rates. The Dow Jones Industrial Average sank 3.3% and the Nasdaq Composite lost 3.2% this month. Real-estate investment trusts are down. Junk bonds are down. Even the safe 10-year Treasury note has been hammered.
Meanwhile, stodgy old income investments have been quietly gaining ground. The average yield on a money-market mutual fund has trundled up steadily to 3.18%, from 0.86% a year ago. A federally insured savings account from Internet bank EmigrantDirect.com now pays out 4%. And several banks have started offering one-year certificates of deposit yielding 4.6%; that's more than the yield on the 10-year Treasury.
"It really is fabulous news for savers," says Peter Crane, managing editor of iMoneyNet, a provider of money-fund information. "Back when rates were 0.5% to 1%, people had become desensitized to yields. Rates were so bad that people didn't even want to hear about it. Now they're starting to break out the calculator and see that they can make an extra few hundred dollars by moving their money to get a better rate."
Put aside the inappropriate comparison of performance with stocks, real estate and junk bonds and focus on the idea that better rates are bringing a smile to the faces of savers. A year ago when yields were at .86%, inflation was in the 1-2% range. Now yields on bank accounts are up to 3.18%, but inflation is way up, too. Notice the correlation? As inflation rises, yields usually do, too. This is because banks have to compensate lenders (which, essentially, is what you are when you make a 'deposit') for the falling purchasing power of their money by offering a higher yield.
If I've got this right, the higher rates aren't "fabulous news" for investors. When inflation is taken into account, investors aren't making any more this year than they were last year. It's more like, "Hey- I'm pretty much where I've always been" news. Nothing to feel bad about, but it doesn't make me smile.
posted by Worker 17 # 9:29 AM 
Archives
June 2005 July 2005 August 2005 September 2005 October 2005 November 2005 December 2005 January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 August 2006 September 2006 October 2007 November 2007 December 2007 January 2008 March 2008 May 2008 January 2009 February 2009 July 2009 November 2009 December 2009 January 2010 April 2010 September 2010 October 2010 November 2010 February 2011 March 2011 April 2011 August 2011 September 2011
Subscribe to Posts [Atom]