High-yield savers will feel the Fed pinch |
| By Laura Bruce • Bankrate.com |
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For the past few years, people who have been willing
to bank online have reaped the benefit of high-yield accounts.
Unfortunately, the Fed's 50 basis point cut means
savers can pretty much kiss 5 percent goodbye. Providers of high-yield
CDs, money markets and money market funds will struggle to meet
that benchmark in the weeks ahead and, by all indications, 5 percent
yields could be a thing of the past within a month.
"Banks aren't going to jump on this rate drop immediately," says Alenka Grealish, managing director of the banking group at Celent, a research and consulting firm. "They're probably going to be reactive and look at each other. No one wants to be the first to stick their neck out and drop the rate because their competitors will pause and hope that they can win some business from them. No one wants to be the first to blink. But eventually they'll move in a pack; they always do."
Grealish says that banks remain deposit hungry and the high-yield providers will think creatively so that deposit growth keeps pace with the lending side of the business. But the subprime downdraft has slowed the sale of credit products and institutions have to be extremely careful about the interest they pay out on deposits.
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| High-yield MMAs |
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5 percent psychological barrier
Nevertheless, taxable high-yield money market funds are averaging 5.05 percent in the Crane 100 Money Fund Index, and Pete Crane, publisher of Money Fund Intelligence, says many institutions will be concerned about dropping rates.
"This last year or so has really cemented the reputation of 5 percent as a very important psychological barrier for cash investors. Some of the people who have been paying over 5 percent are not going to give up that ground lightly because I think it's been a bonanza for them."
But Crane cautions savers against jumping around for
a few basis points on a few thousand dollars.
"If you're talking about less than $10,000, you
should be weighing convenience as much if not more than yield. As
long as you're in the ballpark, you're OK. Before, if you were earning
from 4 percent to 5.5 percent, you were in the ballpark. Now you'll
see the low end going down to 3.5 percent and the high end of money
funds just under 5 percent, so you'll just have to shave your expectations
a little bit."
EverBank has won depositors with a three-month 6.01
percent teaser yield on CDs and money markets, which then drops,
depending on how much is invested, to a yield that EverBank pledges
will be in the top 5 percent of competitive accounts as tracked
by Bankrate.
Executive vice president Frank Trotter says the teaser
rate and the ongoing high yields have been a good way to catch the
attention of customers, and he expects consumers to continue to
respond to his bank's offers even while rates fall.
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