November 12, 2018: The Staggering Low Interest Rates From Big Banks

Nov 13, 2018 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, December 3, 2018. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

The Staggering Low Interest Rates From Big Banks

Cash returns is one of hot topics at MyPlanIQ. We monitor returns from banks, brokerage money markets and brokered CDs and Treasury bills. Our latest check on this indicates an astounding phenomenon: banks can keep rates low for a very very long time to make huge profits.

Interest rates have risen steadily for almost two years now. However, interest rates from big banks for still unbelievably low. The following are what we see from the four major big banks in the US. 

The subzero savings rates from the four big banks

Savings interest rates from the four big banks: 
Bank Savings Rate
Bank of America 0.03%
CitiBank 0.06%
Chase Savings 0.01%
Wells Fargo 0.01%

Some of them offer higher interests for much higher account balance. For example, Wells gives 0.05% if your account balance is over $250k. But that’s still miniscule. 

Meanwhile, the 3 month Treasury bill’s interest (a proxy to cash return) has continuously risen and reached 2.3% recently:

At the moment, the difference is more than 2.3%. We will discuss this in more details shortly. 

With some efforts, one can search internet (example, bankrate.com) and find some much higher rates from other banks. The following shows some good savings rates from two reasonably large banks: Goldman Sachs (aka Marcus) and Ally Bank: 

Bank Savings Rate
Glodman Sachs Marcus 2.01%
Ally Bank 1.9%

These rates, however, are still lower than the ‘theoretical’ cash rate depicted in the above chart. 

Let’s take a look brokerage money markets and direct purchase of brokered CDs and/or Treasury bills next.

Money market, Treasury & Brokered CDs

As we have discussed before, Vanguard’s money market mutual funds have some of the best returns because of their low expenses. 

Money market funds, T Bills, Brokered CDs Rate
Vanguard Prime Money Market Fund 2.23%
Vanguard Federal Money Market Fund 2.12%
Treasury Bill 1 Month 2.16%
Treasury Bill 3 Month 2.31%
Treasury Bill 12 Month 2.64%
Brokered CD 3 Month 2.25%
Brokered CD 12 Month 2.6%

Comments: 

  • The two Vanguard money market funds’ yields are very close to the auction rate 2.3%. They are also better than both Marcus and Ally Bank’s high yield savings accounts. 
  • On the other hand, if you know for certain when you need your money, you can instead directly purchase Treasury bills by yourself, either in a brokerage account (such as Fidelity, Vanguard, Schwab, etc.) or on TreasuryDirect.gov website. Doing so will boost your returns by another 0.1% as you save the expense of a money market fund, for example. 
  • Treasury Bills continue to have higher yields than brokered CDs with the same maturity. This is amazing as Treasury Bills are considered to be the safest (safer than FDIC insured CDs). So your risk into CDs does not pay extra. You might as well buy Treasury Bills instead. We pointed out this a year ago. It looks like bond markets are still adjusting. Talk about efficient markets. 

Of course, one should be aware that, unlike a savings account, money market funds don’t have FDIC insurance and there is no guarantee for them to return 100% principles. However, in the history of money market funds, investors have not lost any money: even for those who held money market funds that ‘broke the buck’ (i.e. lost its $1 NAV (net asset value)), they eventually recouped back their money. Because of the nature of a money market fund composition (there are some strict rules to make sure a money market fund’s NAV falls into $0.995 < NAV < $1.005) and their wide spread usage (thus, government is likely to step in if a crisis like ‘breaking the buck’ occurs), it’s very unlikely for a money market fund to lose money. However, again, this is not guaranteed. 

Finally, let’s look at the above data in a concrete real life example: here we have a young professional who, like many other people, doesn’t have time and/or experience to manage his bank account. On average, his bank account’s cash balance  has been around $80k in one of the four major banks for more than two years. A simple calculation says that his bank has been able to make $80k*2% per year or $1600 per year by simply giving him close to nothing interest return (in fact, the bank didn’t bother to issue a 1099-INT to him in the tax season) while in the meantime, it can lend his deposit to the Federal government, thus getting over 2% interest (the bank can make even more if it lends to other borrowers such as small businesses or even a large company) with little effort. Now, it’s not outrageous to assume there are millions of such professionals. Assuming just a million of such people, banks will make risk free and effortless $1.6 billion profit in a year!

As interest rates have risen for almost 2 years, banks can still just sit and offer nothing to their customers. We can only say people are either uninformed or lazy or both when it comes to managing their finance.  

Market Overview

US stocks recovered strongly last week, only to see they came back down in the last several days. At the moment, majority number of stocks are in a downtrend. For example, the following chart shows that the prices of more than two third  of stocks on New York Stock Exchange are now under their 200 day moving average:

As we stated before, we have no whatever prediction power on how markets will behave in a short term. However, given the current high valuation, over extended markets and also continuously trickling bad news on earnings slowdown (the latest: Apple’s possible production cut), it’s not a good time to chase risk. 

For more detailed asset trend scores, please refer to 360° Market Overview. 

As always, stay the course. 

In terms of investments, U.S. stock valuation is still at a historically high level and it might still have a bigger correction. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

Enjoy Newsletter

How can we improve this newsletter? Please take our survey 

–Thanks to those who have already contributed — we appreciate it.

Latest Articles

Disclaimer:
Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.