Don't Get Too Used to Higher Bank Deposit Rates

05/19/19 02:43 PM EDT
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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