The Long Wait for a Better Rate on Deposits

Banks have traditionally been a little slow to follow interest rate hikes by the Fed with comparable rate increases on their own deposit accounts. But this time around they seem to be moving more slowly than ever.

Our August research report―Higher Deposit Rates-Where Art Thou?―looks back at the past two Fed tightening cycles and compares them with recent history. Despite the 1.00% total increase in the Fed funds rate over the last 19 months, rates on bank deposits and short-term CDs have barely budged. Historically, rates on CDs and money funds have tended to rise with the Fed funds rate, sometimes exceeding the benchmark rate increases. Bank deposit rates usually lagged yield increases in marketable securities somewhat, but nevertheless moved much more quickly than in this cycle. What’s going on? And what should institutional cash investors do about it?

Among other things, abundant bank reserves are reducing the need for banks to pay higher rates on deposits; SEC reforms have made money market funds less attractive as an alternative to bank deposits; and restrictive post-financial-crisis banking regulations have raised banks’ costs of providing deposits. Given those differences from past cycles, it may be time to consider a new approach to liquidity investing.

Our report recommends that cash investors start paying more attention to yields on marketable securities. While prospects for higher deposit rates may improve soon, liquidity investors should consider a portfolio approach that combines deposits with direct purchases of carefully selected securities offering more yield. A thoughtful approach utilizing separately managed accounts may have the potential to offer a better balance of liquidity, risk and return.

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Best Regards,

Ben Campbell
CEO