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Mystery at the Bank
If you read the financial news the way normal people read the comics, sometimes you notice some funny business in the fine print.
The Fed has been jacking up short term interest rates for four months, and there should be some side effects by now. A leading one should be money flowing out of the stock market into new, higher-yielding certificates of deposit and money market funds.
I thought I should make some calls to find out how much higher those CD yields are. The rates which follow are all from calls made on Friday, May 27. This was no scientific survey; but it is representative of CD rates at Boulder County banks. The names of the responding institutions are hidden under a rock near my front porch.
"It's a great day at Megabanc! How can we help you?"
I'd like to check on your CD rates, please.
"I'll connect you to Electronic Consumer Support Services. Hold one moment, please."
"Consumer Support; how can I help you?"
(Astounding. This is a human being, and the wait was only one moment.) What are your CD rates for six months, please, both for a big CD, say $100,000, and a smaller one, maybe $10,000?
"For the big one we are paying 3.05%, and for less than $50,000 it's 3.00%"
How about for a year? "3.50% and 3.45%." (Thanks and goodbye.)
Odd. Very odd indeed. A six-month certificate of deposit is guaranteed by the Federal Deposit Insurance Corporation, which Congress has said is as good as the U.S. Treasury itself.
Oddly enough, the U.S. Treasury sells its own version of six month CDs: Treasury bills maturing in six months. T-bills are direct obligations of the United States (which is theoretically better than a guarantee, though I hope we never find out). T-bills are not in short supply: the Treasury sells about $12,000,000,000 of them every Monday (no joke: twelve billion dollars' worth every Monday), mostly to securities dealers, and to, ah Banks.
The yield on six-month T-bills last Monday was 4.81%, not quite two percent higher than the CD equivalent at the bank. What is going on, here? Are they hard to buy?
There are lots of ways to buy T-0bills. One of the easiest isfrom your bank.
Back on the phone. I got the same, cordial responses everywhere. When I asked about T-bills, the phone answerer always knew what I was asking about, and referred me to an "investment" or "securities" department. No one tried to sell me stocks, insurance, pork bellies, or cattle futures; nor, when I asked about buying a T-bill, did anyone try to convince me of the advantages of their bank's CD at 3.00% over a T-bill at 4.18%.
Transaction cost? Fifty bucks at many places, which knocks 1.00% off the yield on the $10,000 minimum, but is a flea-bite on larger amounts. There are other ways to buy T-bills with no fee. One of the easiest is by phoning the no-cost branch of the Federal Reserve in Denver (572-2300).
More oddities: one year CD rates in and around Boulder are 2.90%-3.50%. Here the one-year T-bill is a full two percent better, paying 5.56%.
Bank "money market" rates run 2.00%-2.25%. "Money market funds" offered by securities firms are not guaranteed by the government, but some of these funds invest only in government-guaranteed securities. "Government" money market funds pay in the 3.4% range, approaching double the yield at some banks.
Lest I seem to be picking on Boulder banks, these yield relationships prevail everywhere in the U.S.
Nor do I mean to pick on banks in general. Banks are not public utilities. They have no obligation to pay a "high" rate to anyone, or to match anybody else's rate.
The rate a bank pays is designed to attract money with which the bank will make loan, earn interest, and a profit. That's an All-American idea; no criticism intended. But, on the other edge of this free market sword, if the banks don't want to pay for money, why does it stay in the banks?
Why would people buy CDs at low rates when they can buy Treasurys at high rates? Much of the low-rate money going into banks the banks then turn around and use to buy Treasurys. Why not cut the bank out of the deal?
Inertia, maybe? A certain amount of convenience, for sure; but a percent and a half worth? Like the lobby furniture, do you? Funny business, money is.
Consider Treasurys. Maybe the Treasury needs the money worse than the banks do.
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