Be patient, savers, help is finally on the way
By Greg McBride, CFA • Bankrate.com

Two interest rate hikes are now in the books, with the Federal Reserve Board's rate-setting committee optimistic about the economy and hinting at more rate increases to come. A positive and long-awaited consequence of higher interest rates is more-favorable yields on deposit products. Savers and anyone dependent upon interest income have been punished mightily in the past four years as yields continually declined to the lowest levels in decades.

Rising interest rates mean the "penalty" that investors have paid in the form of dreadfully low returns on money markets and certificates of deposit is gradually dissipating. The attractiveness of deposit products is further enhanced if the stock, bond and real estate markets sputter amid rising rates.

Stock prices are currently suffering due to high oil prices, the outlook for slower growth in corporate profits, rising interest rates, valuation concerns, uncertainty regarding the election outcome and threat of terror or global economic downturn. After a brutal bear market over the past four years, many market strategists are forecasting lower-than-average stock market returns even in up years through the second half of the decade.

Bond investors have dealt with plenty of volatility lately, with the 10-year Treasury yield soaring from 3.75 percent in March to as high as 4.9 percent in mid-June, only to drop back to 4.25 at present. But rising interest rates are bad news for bonds, and with the Fed boosting short-term rates the writing is on the wall. Gone are the heady bond capital returns produced by interest rates plunging to 45-year lows, and in comes the reality of capital losses for bond investors as rates rise -- an inevitability mentioned by Alan Greenspan in his July 20 Congressional testimony.

The real estate market has attracted a lot of money that was previously devoted to other asset classes as home prices skyrocketed and interest rates plummeted. While the real estate market remains strong on a national basis and red-hot in many local markets, there is increasing concern about a housing bubble. Many forecasters are calling for a return to more modest home price appreciation -- a period of flat home prices or an outright price correction -- depending upon where you live. Whether rising rates will lead to a significant adjustment in home prices remains to be seen, but less impressive returns are inevitable. Lower returns and greater perceptions of risk will divert many investment dollars into a safer haven like cash.

Current deposit yields are anything but generous, with the average one-year CD yield at 1.61 percent and the average money-market account a pitiful 0.47 percent. So where do investors look for competitive deposit returns? Bankrate.com's high-yield CD and money-market listings offer competitive yields while maintaining the protection of FDIC insurance.

Higher interest rates are a likely consequence of higher inflation than experienced in recent years, and finding the most competitive yields gives investors the best opportunity to remain ahead of inflation, preserving the purchasing power of their investments. If returns in other asset classes stall as interest rates rise, cash investments may become more appealing.

Greg McBride is a financial analyst for Bankrate.com.

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