Things are suddenly looking up for retirees and other savers. The interest rate you can earn on low-risk and “risk-free” money — including regular bank accounts, time deposits and U.S. government bonds — has surged sharply from the low levels seen just six weeks ago.
“Yields have risen from the dead since their recent lows in mid-September,” wrote Raymond James bond trader Drew O’Neill in a Halloween-themed post. Savers once again have “an opportunity that many were scared had disappeared following the FOMC’s 50-basis-point rate cut at their last meeting.”
These rates, he added, are a “treat,” not a trick.
You can thank a variety of factors for the rise in rates, including the surprising strength of the “Biden-Harris” economy, the Federal Reserve and Donald Trump’s surge in the polls. But more on that later.
You can get 5.25% interest on a regular savings account from Openbank, a new online bank being rolled out by Spanish banking giant Santander SAN. (The bank tells me it’s not available to residents of the eight states, from Pennsylvania to New Hampshire, currently served by Santander’s retail branch network. Also, you can’t have an open deposit account at Santander, or be a current lending customer. There’s a minimum $500 balance.)
If you’re willing to lock your money up for longer — with the same early-withdrawal conditions — you can get 4% or better on 2-year CDs and even on 5-year CDs.
The standout among 5-year CDs is a 4.35% offer from SchoolsFirst Credit Union, but you have to have a connection to a Californian school or college to become a member. Nationwide, you can get 4% for five years from Synchrony Bank SYF and BMO BMO.
Your money in all these accounts is guaranteed by federal deposit insurance for up to $250,000 per account.
Savers willing to buy 5-year U.S. Treasury bonds BX: TMUBMUSD05Y will get 20% more interest income between now and 2029 than those who bought them in mid-September: The yield, or interest rate, has leapt from 3.41% to 4.11%. Those willing to buy 10-year Treasury notes BX: TMUBMUSD10Y will get 18% more interest income between now and 2034: 4.28% a year, against 3.63% at the lows.
The story is even better when you look at TIPS, or inflation-protected U.S. Treasury bonds. A 10-year TIPS bond will pay you 30% more after inflation if you buy it now than you would have gotten at the lows last month; you’ll get the official annual inflation rate each year plus 2% a year between now and 2034, compared to 1.54% in September. Your postinflation income will be 22% higher on the 5-year bond: inflation plus 1.8%, compared to just 1.47% back then.
You can buy individual TIPS bonds the same way you buy regular Treasury bonds, through pretty much any good brokerage firm. There are also funds which own TIPS, such as Vanguard Inflation-Protected Securities Fund VAIPX and Pimco 1-5 Year U.S. TIPS Index ETF STPZ, and target-year TIPS funds such as the iShares iBonds Oct 2029 Term TIPS ETF IBIF, which buys you a bunch of 5-year TIPS bonds cheaply, and the iShares iBonds Oct 2034 Term TIPS ETF IBIK, which does the same with 10-year TIPS bonds.
These opportunities have arisen since the middle of September thanks to a near-perfect storm of three factors. One is that the Federal Reserve panicked in September about a slowing economy and cut short-term rates by 0.5 percentage points instead of just 0.25 points. This overreaction seemed to spook bond investors, whose expectations of long-term interest rates have started rising again. Fed Chair Jerome Powell blew a lot of hard-earned credibility very quickly.
The second is that the economy has turned out to be much stronger than economists thought two months ago. A stronger economy means more people want to borrow money — to start businesses and buy cars or other goods — and through simple supply and demand, that pushes up interest rates. The borrowers, including the government, banks and credit unions, need to pay you more to attract your dollars.
The third issue is Donald Trump’s dramatic rise in the polls. In mid-September, Trump was trailing Democrat Kamala Harris and seemed to be campaigning poorly.
The turnaround since — for whatever reason — is also affecting bonds. Neutral number crunchers say Trump’s tax and spending plans will add much more to deficits than Harris’s. The argument is that the more money Uncle Sam needs to borrow, the more interest lenders may demand he pay. (The national debt is forecast to rise dramatically under either candidate.)
Phil Camporeale, who manages a global balanced-portfolio mutual fund for Wall Street banking giant J.P. Morgan JPM, told me he thinks the Fed and economic growth are the key factors explaining the latest rise in interest rates.
“I think that’s explained more by the growth dynamic in the U.S. than politics,” he said. “I think this really comes down to the fact that the Federal Reserve misforecasted — misread — the labor market.” The Fed cut rates expecting a sharp slowdown, he noted; instead, the data show the U.S. economy is absolutely in the pink. (Camporeale is portfolio manager of the JPMorgan Global Allocation Fund GAOSX at J.P. Morgan Asset Management.)
But others aren’t so sure we can rule out the effects of the election. After all, long-term interest rates have continued to rise in recent weeks, well after the bond market had to digest September’s strong jobs data. The major development during that time has been Trump’s growing probability of winning next week.
“I believe two potential contributing factors are the continued strength of U.S. economic data and markets pricing in the possibility of a wave outcome in November’s U.S. elections,” said Shailesh Kshatriya, director of investment strategies at Russell Investments. (The “wave” means the Republicans sweeping the White House, Senate and House of Representatives, potentially leading to even bigger deficits.)
Those worried about unsustainable national debt or massive “red wave” deficits will probably find an easier life owning shorter-term bonds and inflation-protected bonds. Countries like the U.S. don’t formally “default” on their national debts; they simply use inflation to whittle down their real value. (This is why U.S. national debt as a percentage of GDP hit its lows in the 1970s.)
As for those worried about the potential effect of politics on their savings: Even if one party “sweeps” the presidency and Congress, they won’t “sweep” the bond market, which will remain firmly in the control of the “green” party. Any politicians who think they can go crazy with debt can expect some angry phone calls at 3 a.m. from people who really matter. No, not voters. Donors.
As Bill Clinton’s adviser James Carville famously said, if there was reincarnation, “I would want to come back as the bond market. You can intimidate everybody.”
The American system, as always, disperses power very, very widely.
