Customers Take Charge: Withdrawal of Deposits Triggers Banks to Increase Interest Rates Amidst a Turbulent Treasury Yield Market
Battle for Deposits: Tired of Getting Screwed by Banks, People Yank their Cash Out, Forcing Banks to Pay Higher Interest Rates
Are you tired of getting screwed by banks with near-0% interest rates on your deposits? Well, you’re not alone. People have finally figured out that they have been getting a raw deal and are moving their money to get better deals. The result is that deposits have become “hot money,” forcing banks to offer higher interest rates. So today, we haven’t seen a battle for deposits in many years.
The Dumping of Low-Interest Accounts
People move their money from low-interest accounts to higher-yielding options such as CDs, money market accounts, and Treasury securities. The goal is to get low-risk returns of 4%-5% or more. Banks are feeling the heat and responding by offering high-interest-rate CDs to attract additional cash to compensate for the money they lost from their regular customers.
The Fight for Deposits
The new thing is that banks offer their existing clients 4% or higher CDs to encourage them to keep their money in their accounts instead of moving it elsewhere. This is a battle for deposits we haven’t seen in many years. People are finally forcing banks to compete for their promises. People force banks to offer higher rates by yanking their money out that’s earning 0.1% in large enough numbers. Banks can always borrow from the Fed’s Discount Window, currently at 5%, but they have to post collateral, making it a better deal to pay people 4% or even 5% without having to post collateral. This is how the Fed’s rate hikes wash into the economy.
Treasury Yields Are a Mess Though
While people get 4%-5% on deposits, Treasury yields are a mess. The yields on Treasury securities with a relatively short remaining maturity are much lower than those of CDs and money market accounts. Regular money market funds and Treasury money market funds are also offering lower yields. The amounts and flows are enormous – between deposits ($17 trillion), Treasury bills ($4.1 trillion of 1-year or shorter maturities), and Treasury securities with a relatively short maturity.
- Banks are feeling the pressure to compete for deposits after the Fed’s interest rate repression killed competition for deposits.
- In 2018, banks offered just over 2% on some CDs and high-yield savings accounts to attract new money when the Fed raised rates timidly.
- President Trump’s criticism of the Fed’s rate hikes and QE in 2018 led to savers, Treasury bill investors, and money-market investors getting re-crushed and back to near 0% yields.
The battle for deposits is a good thing. People should force banks to compete for their promises, and the only way to do that is to yank their money out that’s earning near-0% interest rates. While higher deposit rates are costing banks, it’s providing relief for savers who have suffered from financial repression for 14 years. Unfortunately, however, Treasury yields remain a mess with lower yields than CDs and money market accounts.
The battle for deposits is accurate, and it’s time for savers to demand better bank rates. Banks are pressured to compete for deposits, with people moving their money to higher-yielding options to get low-risk returns of 4%-5% or more. While it’s costly for banks, it’s finally some relief for savers who have suffered from financial repression for years. However, Treasury yields remain a mess, and it’s essential to remember this when deciding where to park your money.