Friday, March 21, 2014

Banks Don't Believe the Rising Interest Rate Story


Click to enlarge.

The data in black shows the interest rate spread between the typical 5-year CD and the 3-month CD on non-jumbo deposits. This series does not pay much attention to every little detail spoken by a Fed Chairman apparently. Just look how smooth and orderly the data moves.

The data in blue shows the interest rate spread between the 5-year treasury and the 3-month treasury. This series apparently loves to pay attention to every little detail spoken by a Fed Chairman. Just look how chaotically the data moves.

Based on the chart, banks sure aren't buying the rising interest rate story. Perhaps it might have something to do with the growing deposit glut. No matter how much lip service the rising interest rate story gets, banks still look at their deposits and no doubt wonder where the rising interest rates will ultimately come from. It's not like they are going to suddenly offer 5% CDs on a whim, now are they?

For what it is worth, the 5-year treasury currently yields roughly 0.75% more per year than the typical 5-year CD. The typical retail investor probably doesn't know how to buy a 5-year treasury though, and I doubt many on Wall Street are going to offer detailed instructions any time soon. And why is that? There's little a middleman likes less than being cut directly out of the transactions. It's also why few on Wall Street will mention I-Bonds or EE-Bonds.

How can Wall Street make enormous profits if everyone is buying directly from the government? No, sir. The best way to make money in today's economy is to day trade violent moves in the fixed income markets with a "trusted" Wall Street professional or two guarding your back. No doubt about it.

This is not investment advice (especially that last paragraph infused with heavy sarcasm).

Source Data:
St. Louis Fed: Custom Chart

14 comments:

Stagflationary Mark said...

Here is a bonus chart that compares the 3-month yields between treasuries and CDs.

I would argue that the Fed's once "artificially low" interest rates are not looking as artificial any longer.

If banks could find more qualified people to loan money to, then they would certainly raise interest rates to attract more depositors.

Heading into the Great Recession, I moved money from my bank to Washington Mutual because they really wanted my money far more than my own bank did. They offered me 4% on my checking! (As expected, they were loaning that money out in a most risky way though (and with excessive leverage using all the powers of the fractional reserve lending system). Did not work out well for them, especially when people like me started moving deposits back out at the first sign of serious trouble.

Troy said...

Did not work out well for them,

http://en.wikipedia.org/wiki/William_K._Black

As for higher interest rates:

http://research.stlouisfed.org/fred2/graph/?g=tYV

total debt ex-TBTF / GDP.

zeroing out Fed-owned debt lowers this ratio to 2.3, but pull the other one anyway.

Star Trek XI Uss Enterprise Gets Caught In Black Hole

I really thought QEn, n+1 would be the 'eject the cores' move, but maybe not.

For that I'm going to actually have to move to Japan I guess.

TJandTheBear said...

Is The Risk Warranted?

Rob Dawg said...

I can see parking 4-5 digits for 3 mo if you know you are going to need it but are there really any jumbo CDs being written? How do you accumulate $100k and be that stupid?

Stagflationary Mark said...

TJandTheBear,

Gold vs. tuition? That's certainly a bit cherry picked. He picked one of the fastest rising services in our service economy (hardly representative).

Gold vs. cash? Cash hasn't been a good store of value for a century. And I would argue that gold hasn't either. The former is extremely volatile as speculators rush in and out. It's had at least one bubble of epic proportions. The latter hasn't been a good store of value either for obvious reasons. Who would have hoarded cash when it could have been earning interest though?

Stagflationary Mark said...

Rob Dawg,

How do you accumulate $100k and be that stupid?

From 2002:

Jumbo CDs Play Tiny Role in Policing Risky Banks ... So Far

The post-FDICIA numbers point to heightened exposure. In the three years running up to the act—1988 through 1990—jumbo-CD holders suffered losses in only 15 percent of 597 bank failures. But from 1993 to 1995, uninsured depositors lost money in 82 percent of the 60 failures.

Funny that the FDIC limit was raised from $100k in recent years to help calm the "So Far" panic, lol. Sigh.

One risk I was taking (before the limit was raised) was that a treasury bond that I owned would mature, the proceeds would be deposited in my bank, and my bank could fail in that small window before I could reinvest the money.

There was also a time when I had two large CDs from two different banks (both under the limit and fully insured). But what if both banks merged? Would I still be fully insured? I doubted it. At some point, I decided it was no longer worth the risk.

There's plenty of risk out there, especially for those not bothering to look for it. Sigh.

I do not understand why anyone would choose to buy the typical 5-year jumbo CD these days over a higher yielding 5-year treasury. You'd think a person with that much money would understand relative risk and relative value.

Stagflationary Mark said...

Troy,

I really thought QEn, n+1 would be the 'eject the cores' move, but maybe not.

I saved your comment for last because I wanted to end on a laugh. Hahaha! Love the analogy.

Troy said...

http://research.stlouisfed.org/fred2/graph/?g=u2j

Above graph with Scotty's QE efforts in red

and debt axis flipped since debt is negative.

TJandTheBear said...

What? No comment on "Gold vs. T-bills"??

Stagflationary Mark said...

Troy,

Interesting chart!

Stagflationary Mark said...

TJandTheBear,

I have no desire to own gold or treasury bills.

With short-term interest rates so low, treasury bills pretty much are cash.

Stagflationary Mark said...

And as a side note, I couldn't get past the tuition and cash arguments. I therefore did not watch the entire video.

TJandTheBear said...

You wouldn't have liked what you heard anyway.

Stagflationary Mark said...

TJandTheBear,

It's not about me not liking what I hear. I often read the opinions of those who disagree with me.

I strongly disagree with Calculated Risk that the future's so bright I gotta wear shades. Doesn't stop me from reading everything he writes though.

The main problem I had with the video is that it started off cherry picking the goods and services that have been inflating the most to compare gold against. I could feel the bias seeping through at me, much like a Monex Commercial would.