Smart moves: savings, checking

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Although he may never have uttered the words, humorist Will Rogers is credited with one of 2008’s most quoted lines which goes something like this: “I’m not as concerned about the return on my money as I am the return of my money.”

CDs and investments

Most people are probably wishing they’d buried their money in certificates of deposit with so-so yields sometime in late 2007. Average CD yields haven’t risen above the level of inflation throughout 2008, which means savers may be losing a small amount of principal but, in hindsight, that’s far preferable to watching your portfolio mirror the losses of the stock markets.

Treasury bonds have also provided weary investors with a safe haven but even worse protection against inflation. The three-month Treasury currently yields 0.01 percent versus the average three-month CD yield of 1.70 percent. The CD wins even though interest from Treasury securities is exempt from state and local taxes.

One bright spot has been high-yield CDs and money markets, which have trumped their average-yielding counterparts throughout the year by 1.5 percent to 3 percent or more. As banks have struggled for deposits, a fair number of them have opted to throw themselves into the fray on the very competitive consumer CD/money market battlegrounds.

Investors are hoping that 2009 will provide more than a temporary respite from 2008’s economic downward spiral. There’s the need to protect what you have and there’s the hope that the economy and the financial markets will begin the recovery process.

In an effort to sort through some options and provide a bit of guidance, we’ve asked experts for their perspectives on what’s ahead for fixed income in 2009.

Herb Hopwood

Hopwood, founder and president of Hopwood Financial Services in Great Falls, Va., says CD and bond investors should expect 2009 to be a strange environment.

“It will probably be a bifurcated market. Depending on which fixed income vehicle is used — Treasuries, corporate bonds, municipal bonds, or CDs — the trend in rates will probably diverge. As the U.S. economy begins to improve in the second half of 2009, U.S Treasury rates should increase as investors will be less concerned about return of principal (which Treasuries provide) and start looking for more return on principal (which Treasuries only minimally provide).

“Investment-grade corporate and municipal bonds, on the other hand, will probably see rates decline from currently high levels as investors feel less concerned about being repaid by these issuers and thus don’t demand as high an interest rate.

“Finally, we expect to see CD rates stay fairly unchanged over the year. Banks will initially keep rates at relatively high levels to attract deposits, but as the year progresses they’ll feel less need to attract deposits as their financial positions improve. They will not increase rates with the improving economy which they normally would do.

“The bottom line is that no one knows for sure what interest rates will be in the future. For this reason, we strongly encourage investors to ladder maturities to maintain reasonable income levels and to take advantage of whatever interest rate environment occurs. If interest rates decline, some of the bonds will be locked in at higher rates. If interest rates increase, money will be coming due in the short-term which can be used to take advantage of higher rates. If rates stay the same, the overall yield generally increases due to the most common occurrence of a positively sloping yield curve (short-term rates are lower than long-term rates) as the lower-yielding short-term maturity is replaced with a higher-yielding long-term maturity.”

William Larkin

Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Mass., says he expects the Obama administration’s recovery plans to trigger a rise in optimism and that the new president’s policies will play a major role in the financial markets during 2009.

“The markets will realize that the era of cheap financing will come to an end. It’s likely that the high-yield defaults will rise drastically in 2009. We’re still seeing the high-yield corporate bond market reach new credit spreads which means that the compensation you get for taking on high-yield is at record levels and I believe that the market is correct in setting it that way. The new issue market is just starting to heal itself and function properly, but only for top tier credits and industry leaders. That’s a problem because if you look at the pyramid, the whole bottom segment of the marketplace is closed out of the market and that’s where we’ll see a lot of unemployment and defaults.

“Investment-grade corporate bonds will still be a good area in 2009 because the compensation is so attractive. The system is self-fulfilling in that it starves you out of the bunker. If you’re in money markets or Treasuries, your yield is so low that you’re going to step out because it’s dead money — your rate of return adjusted for inflation is negative. When the market bottoms out people say, ‘I can’t do this anymore; my money is unproductive.’ They want to do something more productive and that tends to be investment-grade short-term corporate bonds.

“The other part of the credit markets is municipals. I think we’ll see a lot of municipalities find themselves in trouble. Look at the type of municipal obligation. If it’s a direct general obligation where there’s a taxing authority, people will always be willing to lend to it if it’s healthy. When I talk about buying in the municipal bond market I mean critical services such as water and sewer, highways, schools — government obligations that can tax you. (Steer clear of) individual entities such as airports, multi-family projects, industrial development, convention centers and hospitals.

“When it comes to interest rates, I think you need to be concerned that the yield curve is likely to steepen in 2009. The market is anticipating this huge amount of global liquidity that’s going into the system. Banks will have access to capital and they’ll start to lend. At first they’ll tend to lend to the more profitable segments but as time goes on they’ll move down and things will normalize. Their short end is so cheap and the long end is so steep that it will make them very profitable.

“Don’t underestimate how low interest rates can go. People in CDs are going to get starved out unless they go into higher-risk categories like GMAC, or banks that may not be around when the CD matures. You’ll still be covered by the FDIC but it can be a headache.

“I think that TIPS (Treasury Inflation-Protected Securities) are solid. I would hold 5 percent in a portfolio and I think now is a great buying opportunity. I’m still a firm believer that energy will come back to haunt us.”

At the time of our conversation the per share price of the exchange-traded fund — iShares Lehman TIPS bond, symbol TIP, was $93.78.

Greg McBride

McBride, CFA, senior financial analyst,, says: Say goodbye to 2008; the outlook for savers in 2009 is brighter.

“It’s better, but for a different reason than many may suspect. CD yields are unlikely to see a substantive improvement and the Fed is likely to stay on the sidelines for much of 2009. But with inflation pressures easing, savers will see positive real returns — what is earned after inflation — in 2009, unlike the negative, after inflation, return in 2008. Instead of earning 4 percent while inflation was 5 percent, as was the case in 2008, savers will earn 3.5 percent with inflation averaging 2.5 percent in 2009. Even with slightly lower yields, savers will fare better because inflation will drop off so dramatically.”

Checking and savings

In the checking and savings arena, Bankrate’s recently completed 2008 Checking Study shows, once again, that punitive fees are rising for bouncing checks and using an ATM that doesn’t belong to your bank. These are the two fee categories that are extraordinarily costly for consumers and will only get more so in 2009.

Bouncing a check will cost you an average non-sufficient funds fee of $28.95. Many institutions don’t hesitate to ding customers for $35 per bounced check. Use another bank’s ATM and you’ll pay an average surcharge of $1.97, which is likely to be rounded up to $2. If you pay $2 to withdraw $20, you’re paying a 10 percent fee. More often than not, your own bank will also tack on a fee which our study shows averages $1.46.

Make a point of avoiding bounced-check fees by balancing your checkbook or frequently checking your balance online. Circumvent ATM fees by estimating your cash needs and planning your transactions for when you can access your bank’s ATM.

Avoiding interest-bearing accounts is another way you can keep more of your money in 2009. These accounts require an average of more than $3400 to avoid a monthly fee that averages close to $12. That fee will easily wipe out the meager average interest rate of 0.24 percent.

Bank savings accounts have traditionally paid very low interest. You’ll fare far better by signing up for a high-yield money market or savings account. These accounts, when paired up with a free checking account and smart banking habits, can keep you from losing hundreds of dollars a year.

We are digging our way out of one of the worst economies in American history, but the periods of prosperity following these downturns have always been strong. Bankrate has a wealth of articles and calculators that can help you plan for a prosperous 2009.