Savers can rejoice because their deposits are finally earning interest. It’s causing trouble for almost every other sector of the market.
For much of the past 15 years, savers were used to earning little to nothing on their deposits because the Federal Reserve kept interest rates near zero. Those low rates kept funding costs at banks low. Depositors had little incentive to move their cash balances because it was unlikely that they would find a better return without taking on more risk.
That all changed over the past year as the Fed lifted its target for the federal-funds rate nine times, lifting it from near-zero to a range of 4.75% to 5%.
That sudden jump pushed down bond prices and sent shock waves through equity markets. Businesses suddenly faced higher financing costs, which ate away at their profitability.
At first, it looked like boom times for banks. They were able to charge more for loans, while paying basically the same amount for deposits. Customers had little reason to undergo the hassle of moving their money to another bank, or into another asset class, for only a little more yield elsewhere.
But two factors have shattered that logic. Rates on money-market accounts are near 4%, making it worth customers’ while to move money out of savings accounts that offer little or nothing. Worry about banks’ survival spurred by this month’s collapses of Silicon Valley Bank and Signature Bank have given depositors, especially those with more than the $250,000 covered by the Federal Deposit Insurance Corp., an additional reason to move funds.
Well-heeled clients at
Charles Schwab
(ticker: SCHW) have been yanking their cash from low-yielding sweep accounts in favor of CDs and money market accounts. The firm said in mid March that it has ample liquidity and a diversified base of depositors.
Analysts at
Citigroup
expect that money-market funds will account for 41% of cash balances at Schwab, up from 32% in the fourth quarter of 2022, and 16% in the first quarter of 2021.
“The movement of cash sweep balances into money-market funds and other higher yielding instruments should persist in the near term, although we see some signals that the pace could decline,” Citigroup analysts wrote Wednesday, noting that the net weekly flow of money into money-market accounts decreased by more than $1 billion over the past week.
But the broader increase in money-market fund balances extends beyond Schwab. Over the past year, the amount of money in money-market funds increased by roughly $400 billion to just over $5 trillion, according to data pulled by Torsten Slok, chief economist at
Apollo Global Management.
In the week ended March 17, more than $100 billion went into money-market funds, he found.
That spells trouble for other financial assets. When savers can earn a return on cash, other securities such as stocks and bonds start to look much less attractive.
“Cash offers ~5% returns, a compelling alternative to the
S&P 500
index especially given that our year-end target (S&P at 4000) suggests limited near-term upside,” Savita Subramanian, an equity and quantitative strategist at BofA Securities, wrote Wednesday. Households tend to lower their allocation to stocks once cash is able to earn more than 4.5%, Subramanian found, looking back to data from 1990.
The outlook for bonds isn’t much better, Subramanian said, citing a “euphoric” sentiment for the asset class even though two of the largest historic buyers of U.S. Treasuries, the Fed and China, are no longer buying.
For now, cash appears to be king—especially when it yields more than 4% with a strong measure of certainty.
But even savers have reason to be cautious. When banks see a risk that they will lose deposits, their natural move is to raise the rates they offer on customers’ accounts. That boosts their funding costs, making them less willing to issue loans at favorable terms. The Fed’s January Senior Loan Officer Opinion Survey found that banks were tightening their lending standards during the fourth quarter, long before the troubles at Silicon Valley Bank and Signature Bank were well known.
Should savers turn into borrowers, they may realize that higher rates are a double-edged sword.
Write to Carleton English at carleton.english@dowjones.com
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