Cash is returning high now but how quickly will they fallbg

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gavinsiu
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Cash is returning high now but how quickly will they fallbg

Post by gavinsiu »

Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
Grt2bOutdoors
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Re: Cash is returning high now but how quickly will they fallbg

Post by Grt2bOutdoors »

If a bank doesn't need funding, it will lower the rates they offer, the money usually will then leave the bank.
If the market offers funding for a lower rate, the bank will get its funding from there instead. There is no reason to offer you a high rate of interest when it can lower its cost of financing elsewhere.

How quickly can rates fall? If you are in a deposit account that is not a term (CD) deposit, they can fall as quickly as overnight or sooner.

What is your concern? Falling rates? Then the solution is to ladder your cash so that the interest rate earned will not fall as quickly as in the examples above.
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whodidntante
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Re: Cash is returning high now but how quickly will they fallbg

Post by whodidntante »

Rates can go to zero faster than they came up from there.
UpperNwGuy
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Post by UpperNwGuy »

gavinsiu wrote: Sun Jan 22, 2023 4:02 pm Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
Why are you asking? Do you keep a lot of your money in bank accounts? If so, why?
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JoMoney
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Re: Cash is returning high now but how quickly will they fallbg

Post by JoMoney »

Rates can fall quickly. Looking at a chart of one of my money market funds,
In Dec-2000 rates were above 6%, fell below 2% in late 2001, below 1% in 2003
In Sep-2007 rates were at 5%, then in the 2-3% range late 2008, and fell to 0% Feb-2009
In July-2019 was just above 2% and fell to 0% in March-2020

This 3-Month T-Bill chart is probably a reasonable estimation of what money market funds, and high-yield bank accounts could be doing:
Image
https://fred.stlouisfed.org/graph/?g=YKdl
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gavinsiu
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Re: Cash is returning high now but how quickly will they fallbg

Post by gavinsiu »

Thanks for the details, one reason I asked is that I have notice rates have climbed rather quickly. After years of stagnate rates of change, I have notice that rate have climbed dramatically within a short period of time. This makes me wonder if rates will drop just as quickly.

The question isn't entirely academic though. As I age, I am seeing that I will need more and more fixed income. In the past, my cash need was minimal because I was young and single. Now I own a house and have a family and need to hold more cash. I feel that I need to get a handle on the fixed income side. For example, since interest rate can fall, I might have to counterintuitively buy bond asset with longer duration to lock in the rate even if it might offer a slightly lower return.

Philosophically, I feel that the fix income side because it requires more attention. The stock side of stuff tend to run itself while it's goal is so far in the future that I can't even see it clearly, so the plans tend to be more of a trend than a detail plan. The cash stuff tend to be more urgent and in the now.
Makefile
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Re: Cash is returning high now but how quickly will they fallbg

Post by Makefile »

Grt2bOutdoors wrote: Sun Jan 22, 2023 9:01 pm If a bank doesn't need funding, it will lower the rates they offer, the money usually will then leave the bank.
If the market offers funding for a lower rate, the bank will get its funding from there instead. There is no reason to offer you a high rate of interest when it can lower its cost of financing elsewhere.
If one of the posters who is more of an economist than I am (which is not at all) would join in, I would like to hear more thoughts on this. My uninformed observation is that this is a romanticized/pre-deregulation/pre-mega bank merger view of banking. The current Bank of America savings account rate is 0.01% (or 0.04% for preferred customers) and the rates at Capital One and Marcus (just examples I looked up) are both 3.3%.

If savings accounts were an efficient market then it would seem Capital One and Marcus are in dire straits while Bank of America is flush with cash, but is that reality?

Do personal savings accounts truly play any significant role in the operation of mega-banks? Or are personal checking and savings accounts not so much a source of funds as a loss-leader to bring in customers for more profitable products such as credit and debit cards, mortgages, and sales of load mutual funds and insurance.
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Re: Cash is returning high now but how quickly will they fallbg

Post by mikeyzito22 »

gavinsiu wrote: Sun Jan 22, 2023 10:19 pm Thanks for the details, one reason I asked is that I have notice rates have climbed rather quickly. After years of stagnate rates of change, I have notice that rate have climbed dramatically within a short period of time. This makes me wonder if rates will drop just as quickly.

The question isn't entirely academic though. As I age, I am seeing that I will need more and more fixed income. In the past, my cash need was minimal because I was young and single. Now I own a house and have a family and need to hold more cash. I feel that I need to get a handle on the fixed income side. For example, since interest rate can fall, I might have to counterintuitively buy bond asset with longer duration to lock in the rate even if it might offer a slightly lower return.

Philosophically, I feel that the fix income side because it requires more attention. The stock side of stuff tend to run itself while it's goal is so far in the future that I can't even see it clearly, so the plans tend to be more of a trend than a detail plan. The cash stuff tend to be more urgent and in the now.
It seems like you are thinking of place to be able to spend from. You call it your fixed income side, but by the post above it seems more like an emergency fund. There are many great choices for fixed income, but what you have said is that you have a house and a family and you need to hold more cash. Treasuries yield more and can be bought at a brokerage on the secondary market. At fidelity and most other brokerages you can get a zero coupon treasury from 4.3 to 4.8 percent right now, depending on duration. I suppose the question is: Is this part of your portfolio strategy or more like a repository of cash you may need to use? It would be good for you to think about if and when you may need this "cash," or is it something that you maintain to hold for the future. There are many other places, whether it be bonds or treasuries that may make sense, other than a bank account.
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Re: Cash is returning high now but how quickly will they fallbg

Post by JoMoney »

Makefile wrote: Sun Jan 22, 2023 10:28 pm
Grt2bOutdoors wrote: Sun Jan 22, 2023 9:01 pm If a bank doesn't need funding, it will lower the rates they offer, the money usually will then leave the bank.
If the market offers funding for a lower rate, the bank will get its funding from there instead. There is no reason to offer you a high rate of interest when it can lower its cost of financing elsewhere.
If one of the posters who is more of an economist than I am (which is not at all) would join in, I would like to hear more thoughts on this. My uninformed observation is that this is a romanticized/pre-deregulation/pre-mega bank merger view of banking. The current Bank of America savings account rate is 0.01% (or 0.04% for preferred customers) and the rates at Capital One and Marcus (just examples I looked up) are both 3.3%.

If savings accounts were an efficient market then it would seem Capital One and Marcus are in dire straits while Bank of America is flush with cash, but is that reality?

Do personal savings accounts truly play any significant role in the operation of mega-banks? Or are personal checking and savings accounts not so much a source of funds as a loss-leader to bring in customers for more profitable products such as credit and debit cards, mortgages, and sales of load mutual funds and insurance.
How banks operate really is a curious thing. My vague understanding is that a customer deposit at a bank is actually a liability on their books, whereas money loaned out is an asset. When money is tight, they need deposits to meet reserve requirements, they can't have everything loaned out.. or can they (?) when "reserve requirements" are set to 0% https://www.federalreserve.gov/newseven ... 00315b.htm it would seem they're encouraged to have infinite money available to loan out to anyone that wants it (at a higher rate than it costs them)...
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gavinsiu
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Re: Cash is returning high now but how quickly will they fallbg

Post by gavinsiu »

Makefile wrote: Sun Jan 22, 2023 10:28 pm If one of the posters who is more of an economist than I am (which is not at all) would join in, I would like to hear more thoughts on this. My uninformed observation is that this is a romanticized/pre-deregulation/pre-mega bank merger view of banking. The current Bank of America savings account rate is 0.01% (or 0.04% for preferred customers) and the rates at Capital One and Marcus (just examples I looked up) are both 3.3%.
I am not an economist, but I have read some articles on this topic. In school, we are taught that banks loan out a deposit and then make money on the spread. This is true to an extent, but from what I read, it should be viewed in reverse. The bank loans out money, which then creates a need to collect a deposit to meet government regulations on saving to loan ratio. The government imposes these rules because banks will try to make as much money as possible and loan out money they don't have. The government insures deposit through FDIC, so it is in their interest to rein in banks to reduce the government's liability.

As to the variation in saving rate, it's a market thing. The banks that offer low rates are the brick and mortar banks that have higher overheads, but are trusted by an older population who often have more money than the younger population. In my opinion, they are more trusted because they have a physical location. My mom for example will grumble about the crappy 0.05% rate but won't switch to an internet bank for a 4% account. This is despite knowing that Wells Fargo was involved in a scandal where they sign people up for products without their knowledge and that FDIC insures internet bank. She just want to physically go to a branch and withdraw money in person.
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Re: Cash is returning high now but how quickly will they fallbg

Post by gavinsiu »

mikeyzito22 wrote: Sun Jan 22, 2023 10:43 pm It seems like you are thinking of place to be able to spend from. You call it your fixed income side, but by the post above it seems more like an emergency fund. There are many great choices for fixed income, but what you have said is that you have a house and a family and you need to hold more cash. Treasuries yield more and can be bought at a brokerage on the secondary market. At fidelity and most other brokerages you can get a zero coupon treasury from 4.3 to 4.8 percent right now, depending on duration. I suppose the question is: Is this part of your portfolio strategy or more like a repository of cash you may need to use? It would be good for you to think about if and when you may need this "cash," or is it something that you maintain to hold for the future. There are many other places, whether it be bonds or treasuries that may make sense, other than a bank account.
Yes, I am currently thinking more in terms of emergency funds, but it is less of an emergency but more of a future liability. One day, I will need to replace my vehicle, so I need the cash on hand to pay for a new one. However, I don't know when I will need a new car, but as the car age the probability of needing it replace will be more certain. Because I have to hold more liquid asset, this mean I also have to try to managed it more efficiently. When I was younger, my EF was $10K, even if I made 10% off, it wouldn't be enough to bother. Now, my property tax is over $10K, so I need way more cash.
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Re: Cash is returning high now but how quickly will they fallbg

Post by Marseille07 »

gavinsiu wrote: Sun Jan 22, 2023 4:02 pm Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
HYSA APY generally reacts to the Federal Fund Rate. The banks pocket the spread between the FFR and the APY they pay you.
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Post by enad »

My understanding is the rates will remain high for at least 2 years before falling and when they fall, they can and often do fall very fast. It is what it is, and I won't sweat it.
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Makefile
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Re: Cash is returning high now but how quickly will they fallbg

Post by Makefile »

Marseille07 wrote: Mon Jan 23, 2023 12:05 am
gavinsiu wrote: Sun Jan 22, 2023 4:02 pm Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
HYSA APY generally reacts to the Federal Fund Rate. The banks pocket the spread between the FFR and the APY they pay you.
But when the federal funds rate drops to zero (obviously not over the past year, but the majority of the time since 2009) high yield savings rates don't drop quite as far, bottoming out around 0.80% or so.
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Re: Cash is returning high now but how quickly will they fallbg

Post by Marseille07 »

Makefile wrote: Mon Jan 23, 2023 1:00 am But when the federal funds rate drops to zero (obviously not over the past year, but the majority of the time since 2009) high yield savings rates don't drop quite as far, bottoming out around 0.80% or so.
I believe that's because they try to make more than 0.8% by lending the money elsewhere. FFR spread isn't the only avenue they seek.
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Re: Cash is returning high now but how quickly will they fallbg

Post by moneyflowin »

That's how savings and loans worked in the old days. Today, the financial markets work differently, especially for larger banks.

Now, banks make loans then sell the loans to investors in asset-backed securities (such as MBSes), which frees up capital. Then they do it again and again. Their profit comes from underwriting fees and any interest they collect while they're holding the loans.

They don't need to attract as much deposits as they did 40 years ago, so they don't offer attractive deposit rates anymore

We'll never go back to the days when deposit accounts paid real rates. I remember making 5% on FDIC MMAs in the 1990s when inflation was 2-3%
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Re: Cash is returning high now but how quickly will they fallbg

Post by jebmke »

gavinsiu wrote: Sun Jan 22, 2023 10:19 pm Thanks for the details, one reason I asked is that I have notice rates have climbed rather quickly. After years of stagnate rates of change, I have notice that rate have climbed dramatically within a short period of time. This makes me wonder if rates will drop just as quickly.

The question isn't entirely academic though. As I age, I am seeing that I will need more and more fixed income. In the past, my cash need was minimal because I was young and single. Now I own a house and have a family and need to hold more cash. I feel that I need to get a handle on the fixed income side. For example, since interest rate can fall, I might have to counterintuitively buy bond asset with longer duration to lock in the rate even if it might offer a slightly lower return.

Philosophically, I feel that the fix income side because it requires more attention. The stock side of stuff tend to run itself while it's goal is so far in the future that I can't even see it clearly, so the plans tend to be more of a trend than a detail plan. The cash stuff tend to be more urgent and in the now.
If you have a funded bucket for short term needs (however big or small), fixed income need not take any more attention than equity. In fact, in taxable, equity might be a smidge higher due to volatility-generated tax loss harvesting.
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Re: Cash is returning high now but how quickly will they fallbg

Post by seajay »

gavinsiu wrote: Sun Jan 22, 2023 4:02 pm sh is returning high now
Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
Cash is returning less now when inflation is 6.5 percent, so 4 percent on cash = -2.5 percent real ... than when inflation was 2 percent or less and cash returned 0 percent.

In some respects the latter was nicer, as you didn't have to deposit/invest cash, stuffing it under a mattress was more assured of 'getting it back' than was transferring it onto banks books for a I.O.U whilst they speculated with that capital.
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Re: Cash is returning high now but how quickly will they fallbg

Post by JoMoney »

seajay wrote: Mon Jan 23, 2023 9:31 am
gavinsiu wrote: Sun Jan 22, 2023 4:02 pm sh is returning high now
Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
Cash is returning less now when inflation is 6.5 percent, so 4 percent on cash = -2.5 percent real ... than when inflation was 2 percent or less and cash returned 0 percent.

In some respects the latter was nicer, as you didn't have to deposit/invest cash, stuffing it under a mattress was more assured of 'getting it back' than was transferring it onto banks books for a I.O.U whilst they speculated with that capital.
... and you didn't owe taxes on the phantom gains inflated away
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Re: Cash is returning high now but how quickly will they fallbg

Post by toddthebod »

seajay wrote: Mon Jan 23, 2023 9:31 am
gavinsiu wrote: Sun Jan 22, 2023 4:02 pm sh is returning high now
Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
Cash is returning less now when inflation is 6.5 percent, so 4 percent on cash = -2.5 percent real ... than when inflation was 2 percent or less and cash returned 0 percent.

In some respects the latter was nicer, as you didn't have to deposit/invest cash, stuffing it under a mattress was more assured of 'getting it back' than was transferring it onto banks books for a I.O.U whilst they speculated with that capital.
Inflation is not 6.5%, has not been 6.5% for months, and is unlikely to be 6.5% in the near future. You cannot compare future returns to past inflation, especially not inflation from >6 months ago.
Backtests without cash flows are meaningless. Returns without dividends are lies.
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Re: Cash is returning high now but how quickly will they fallbg

Post by jebmke »

seajay wrote: Mon Jan 23, 2023 9:31 am
gavinsiu wrote: Sun Jan 22, 2023 4:02 pm sh is returning high now
Bank accounts are returning over 4 percent now, but what factors will cause them to fall and how quickly will they drop.
Cash is returning less now when inflation is 6.5 percent, so 4 percent on cash = -2.5 percent real ... than when inflation was 2 percent or less and cash returned 0 percent.

In some respects the latter was nicer, as you didn't have to deposit/invest cash, stuffing it under a mattress was more assured of 'getting it back' than was transferring it onto banks books for a I.O.U whilst they speculated with that capital.
The 4% on cash is forward looking (and not that far forward at that). We have no idea (only some estimates) of what inflation is going forward.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Re: Cash is returning high now but how quickly will they fallbg

Post by Grt2bOutdoors »

Makefile wrote: Sun Jan 22, 2023 10:28 pm
Grt2bOutdoors wrote: Sun Jan 22, 2023 9:01 pm If a bank doesn't need funding, it will lower the rates they offer, the money usually will then leave the bank.
If the market offers funding for a lower rate, the bank will get its funding from there instead. There is no reason to offer you a high rate of interest when it can lower its cost of financing elsewhere.
If one of the posters who is more of an economist than I am (which is not at all) would join in, I would like to hear more thoughts on this. My uninformed observation is that this is a romanticized/pre-deregulation/pre-mega bank merger view of banking. The current Bank of America savings account rate is 0.01% (or 0.04% for preferred customers) and the rates at Capital One and Marcus (just examples I looked up) are both 3.3%.

If savings accounts were an efficient market then it would seem Capital One and Marcus are in dire straits while Bank of America is flush with cash, but is that reality?

Do personal savings accounts truly play any significant role in the operation of mega-banks? Or are personal checking and savings accounts not so much a source of funds as a loss-leader to bring in customers for more profitable products such as credit and debit cards, mortgages, and sales of load mutual funds and insurance.
There is a reason why Chase and the other mega banks operate large branch networks. It’s the cheapest source of funding relative to other sources. The notion that this is a romanticized from a previous era is way off base. Go read the latest earnings presentations and don’t forget the 10-q and call reports as well. Capital One like most banks offer various interest rates or none at all for different account products. You’d be amazed how much capital is tied up low to non interest bearing accounts. Multiply a typical checking account holding $1,000 times 100 million accounts. BofA claims to bank 1 out of every 2 Americans, that’s over 100 million account numbers. Now we are talking real money. How much money? BofA has over $1 trillion in low cost deposits. Each 1% rise in the market rate of interest earned for them generates how much? If they are paying out little to no interest expense to those leaving their money in the bank, they are essentially minting money.
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Re: Cash is returning high now but how quickly will they fallbg

Post by Makefile »

Grt2bOutdoors wrote: Mon Jan 23, 2023 8:28 pm
Makefile wrote: Sun Jan 22, 2023 10:28 pm
Grt2bOutdoors wrote: Sun Jan 22, 2023 9:01 pm If a bank doesn't need funding, it will lower the rates they offer, the money usually will then leave the bank.
If the market offers funding for a lower rate, the bank will get its funding from there instead. There is no reason to offer you a high rate of interest when it can lower its cost of financing elsewhere.
If one of the posters who is more of an economist than I am (which is not at all) would join in, I would like to hear more thoughts on this. My uninformed observation is that this is a romanticized/pre-deregulation/pre-mega bank merger view of banking. The current Bank of America savings account rate is 0.01% (or 0.04% for preferred customers) and the rates at Capital One and Marcus (just examples I looked up) are both 3.3%.

If savings accounts were an efficient market then it would seem Capital One and Marcus are in dire straits while Bank of America is flush with cash, but is that reality?

Do personal savings accounts truly play any significant role in the operation of mega-banks? Or are personal checking and savings accounts not so much a source of funds as a loss-leader to bring in customers for more profitable products such as credit and debit cards, mortgages, and sales of load mutual funds and insurance.
There is a reason why Chase and the other mega banks operate large branch networks. It’s the cheapest source of funding relative to other sources. The notion that this is a romanticized from a previous era is way off base. Go read the latest earnings presentations and don’t forget the 10-q and call reports as well. Capital One like most banks offer various interest rates or none at all for different account products. You’d be amazed how much capital is tied up low to non interest bearing accounts. Multiply a typical checking account holding $1,000 times 100 million accounts. BofA claims to bank 1 out of every 2 Americans, that’s over 100 million account numbers. Now we are talking real money. How much money? BofA has over $1 trillion in low cost deposits. Each 1% rise in the market rate of interest earned for them generates how much? If they are paying out little to no interest expense to those leaving their money in the bank, they are essentially minting money.
I did say uninformed observation. What portion of those accounts is business accounts rather than personal though?
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Re: Cash is returning high now but how quickly will they fallbg

Post by Grt2bOutdoors »

Makefile wrote: Mon Jan 23, 2023 8:30 pm
Grt2bOutdoors wrote: Mon Jan 23, 2023 8:28 pm
Makefile wrote: Sun Jan 22, 2023 10:28 pm
Grt2bOutdoors wrote: Sun Jan 22, 2023 9:01 pm If a bank doesn't need funding, it will lower the rates they offer, the money usually will then leave the bank.
If the market offers funding for a lower rate, the bank will get its funding from there instead. There is no reason to offer you a high rate of interest when it can lower its cost of financing elsewhere.
If one of the posters who is more of an economist than I am (which is not at all) would join in, I would like to hear more thoughts on this. My uninformed observation is that this is a romanticized/pre-deregulation/pre-mega bank merger view of banking. The current Bank of America savings account rate is 0.01% (or 0.04% for preferred customers) and the rates at Capital One and Marcus (just examples I looked up) are both 3.3%.

If savings accounts were an efficient market then it would seem Capital One and Marcus are in dire straits while Bank of America is flush with cash, but is that reality?

Do personal savings accounts truly play any significant role in the operation of mega-banks? Or are personal checking and savings accounts not so much a source of funds as a loss-leader to bring in customers for more profitable products such as credit and debit cards, mortgages, and sales of load mutual funds and insurance.
There is a reason why Chase and the other mega banks operate large branch networks. It’s the cheapest source of funding relative to other sources. The notion that this is a romanticized from a previous era is way off base. Go read the latest earnings presentations and don’t forget the 10-q and call reports as well. Capital One like most banks offer various interest rates or none at all for different account products. You’d be amazed how much capital is tied up low to non interest bearing accounts. Multiply a typical checking account holding $1,000 times 100 million accounts. BofA claims to bank 1 out of every 2 Americans, that’s over 100 million account numbers. Now we are talking real money. How much money? BofA has over $1 trillion in low cost deposits. Each 1% rise in the market rate of interest earned for them generates how much? If they are paying out little to no interest expense to those leaving their money in the bank, they are essentially minting money.
I did say uninformed observation. What portion of those accounts is business accounts rather than personal though?
Yes, you did. That information is available but you’d likely need to read the FDIC call reports to sift through the data. If you are a corporate treasurer you would seek to maximize the return in capital, that means investing the assets in high yielding short term investments like US Treasuries and commercial paper and money funds.
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Re: Cash is returning high now but how quickly will they fallbg

Post by Makefile »

Grt2bOutdoors wrote: Mon Jan 23, 2023 8:35 pm Yes, you did. That information is available but you’d likely need to read the FDIC call reports to sift through the data. If you are a corporate treasurer you would seek to maximize the return in capital, that means investing the assets in high yielding short term investments like US Treasuries and commercial paper and money funds.
I see. Part of my uninformed observations were based on reading past news articles about the increasing proportion of bank income from fees and that all the COVID stimulus messed up their projections for 2020 a bit by causing customers to incur fewer overdraft fees.
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Re: Cash is returning high now but how quickly will they fallbg

Post by Grt2bOutdoors »

Makefile wrote: Mon Jan 23, 2023 8:51 pm
Grt2bOutdoors wrote: Mon Jan 23, 2023 8:35 pm Yes, you did. That information is available but you’d likely need to read the FDIC call reports to sift through the data. If you are a corporate treasurer you would seek to maximize the return in capital, that means investing the assets in high yielding short term investments like US Treasuries and commercial paper and money funds.
I see. Part of my uninformed observations were based on reading past news articles about the increasing proportion of bank income from fees and that all the COVID stimulus messed up their projections for 2020 a bit by causing customers to incur fewer overdraft fees.
Overdraft fees are a small proportion of their fees earned. As of the most recent call report dated 9/30/22 - BofA earned 3.4 billion on various service charges on deposit accounts held at it's branches. While that may seem substantial, those fees are dwarfed by the 38 billion earned in interest income related to loan making activities and the 5.5 billion earned from trading activity, and other income categories. The increasing proportion of fee income is still overshadowed by more than 3 to 1 by traditional loan making activity of banks, for that they need low cost funding to earn a high enough margin permitting them to pay employees and other expenses as well as turn a profit for their shareholders. You can find this data at fdic.gov for BofA and any other banking institution which is regulated by them.
Last edited by Grt2bOutdoors on Mon Jan 23, 2023 11:13 pm, edited 1 time in total.
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Re: Cash is returning high now but how quickly will they fallbg

Post by mikeyzito22 »

gavinsiu wrote: Sun Jan 22, 2023 11:58 pm
mikeyzito22 wrote: Sun Jan 22, 2023 10:43 pm It seems like you are thinking of place to be able to spend from. You call it your fixed income side, but by the post above it seems more like an emergency fund. There are many great choices for fixed income, but what you have said is that you have a house and a family and you need to hold more cash. Treasuries yield more and can be bought at a brokerage on the secondary market. At fidelity and most other brokerages you can get a zero coupon treasury from 4.3 to 4.8 percent right now, depending on duration. I suppose the question is: Is this part of your portfolio strategy or more like a repository of cash you may need to use? It would be good for you to think about if and when you may need this "cash," or is it something that you maintain to hold for the future. There are many other places, whether it be bonds or treasuries that may make sense, other than a bank account.
Yes, I am currently thinking more in terms of emergency funds, but it is less of an emergency but more of a future liability. One day, I will need to replace my vehicle, so I need the cash on hand to pay for a new one. However, I don't know when I will need a new car, but as the car age the probability of needing it replace will be more certain. Because I have to hold more liquid asset, this mean I also have to try to managed it more efficiently. When I was younger, my EF was $10K, even if I made 10% off, it wouldn't be enough to bother. Now, my property tax is over $10K, so I need way more cash.
Treasuries are just as liquid as cash in most instances. They are sold on the secondary market, right now yield more than cash, and settle just as fast as a stock sale. You could always match a treasury's length to when you think you may need a new car. I would say buy a three month treasury, a six month treasury, and a year treasury. If you need the car, you will always have a treasury maturing. Also, treasury interest is exempt from state taxes.
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cbox
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Re: Cash is returning high now but how quickly will they fallbg

Post by cbox »

Grt2bOutdoors wrote: Sun Jan 22, 2023 9:01 pm What is your concern? Falling rates? Then the solution is to ladder your cash so that the interest rate earned will not fall as quickly as in the examples above.
Agree. That's what I have done. I have one more rung to build out my ladder and am betting interest rates will rise a tiny bit after the next Fed meeting (this week?). If they continue rising after that, well, I'll add another rung to my ladder. This near-cash portion of my portfolio has really proven its worth over the past couple of years in allowing me t sleep well at night and not give a whit about market volatility. I don't care if it doesn't earn as much as some other portion of my portfolio *potentially* could. That's not its purpose in the first place. Of course, I'm near retirement, so my "human capital" (that ability to invest into downturns with income/additional investment) is near the end.
mike2468
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Re: Cash is returning high now but how quickly will they fallbg

Post by mike2468 »

I was wondering if anyone thought about buying long term add-on CD's? Would be nice to lock in these higher rates for the long term. I see that Mountain Credit Union has a 5 year add-on CD that pays 4.25% currently. It can be opened only with $5 and requires $10 monthly installments and has a maximum of $100K per CD. My intentions are to open one now and fund later in 1,2,3, or 4 years down the road depending on when I need the money.
JackoC
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Re: Cash is returning high now but how quickly will they fallbg

Post by JackoC »

Makefile wrote: Sun Jan 22, 2023 10:28 pm
Grt2bOutdoors wrote: Sun Jan 22, 2023 9:01 pm If a bank doesn't need funding, it will lower the rates they offer, the money usually will then leave the bank.
If the market offers funding for a lower rate, the bank will get its funding from there instead. There is no reason to offer you a high rate of interest when it can lower its cost of financing elsewhere.
If one of the posters who is more of an economist than I am (which is not at all) would join in, I would like to hear more thoughts on this. My uninformed observation is that this is a romanticized/pre-deregulation/pre-mega bank merger view of banking. The current Bank of America savings account rate is 0.01% (or 0.04% for preferred customers) and the rates at Capital One and Marcus (just examples I looked up) are both 3.3%.

If savings accounts were an efficient market then it would seem Capital One and Marcus are in dire straits while Bank of America is flush with cash, but is that reality?

Do personal savings accounts truly play any significant role in the operation of mega-banks? Or are personal checking and savings accounts not so much a source of funds as a loss-leader to bring in customers for more profitable products such as credit and debit cards, mortgages, and sales of load mutual funds and insurance.
That's not a complicated economics topic IMO. The basic answer is no, the market for deposit rates isn't efficient at all. Not entirely or even necessarily mainly because how banks behave, which seems the focus of most responses, but how depositors behave. Almost everyone knows people who take obviously too low CD rates or even keep significant money in zero/near zero checking and saving accounts. For some combination of reasons that makes sense to them ('I know the folks down at the bank with the lousy rates'), ignorance, lack of any thought about it, whatever, but people obviously do this. And even well informed thinking people find it more convenient to have some money in a 0% checking account at major bank than checking accts that pay much more at smaller banks/CU's sometimes (but often balance limits and hoops to jump). That adds up.

On the bank side it can be presumed rational. Different banks have different abilities to attract funds at below market rates due to their customer base and business. An online-only bank tends to build its customer base in the first place with competitive deposit rates, BOA doesn't attract its customers that way. And their regulators and/or internal risk management have varying appetite for 'steady' customer deposits v raising money in the money market. Which again would depend on the business model and asset side. A bank which holds more in liquid bonds on the asset side needn't worry quite as much about funding difficulties in the professional money market because it can sell those assets more easily or use them as collateral. A bank with a more traditional portfolio of local loans they originate and do not package for sale, has more need of a presumed more stable (protected by FDIC) deposit base to manage liquidity. That will be reflected in how competitive its deposit rates are, again in an inefficient consumer market where a below market deposit rate will still attract *some* deposits. In the professional money market an even slightly off market rate won't attract a single $.

On original question (assuming not common apples v oranges of stocks v safe assets but rather bank deposits or 'bonds'), one key concept is the term premium. The term premium is the not directly visible premium in eg. the 5 yr note (or STRIPS to be technical) yield over the expected return of rolling over short term T-bills for the next 5 yrs. It's not the current difference in 5 yr and T-bill yields, but the difference between the 5 yr point and expected rollover rates on short term instruments for next 5 yrs. If the term premium is positive there's a better reason to invest in a 5 yr than 'cash'. If the term premium is zero there's less reason. Lately, term structure models seeking to quantify the term premium have found it smaller than it used to be, even negative. At zero term premium, the lower 5 yr rate currently than short bill rate just reflects the expectation that T-bill rates will average less than they are now for the next 5 yrs. Another complication though is the *best* bank deposit rates and treasury rates vary relatively, over time and across the curve. Right now best saving account rates are comprable to short T-bill rates, under 'zero rate' policy for bills the tendency was for best bank account rates to be significantly more than zero. OTOH the best 3-5yr CD rates now are close to a whole 1% higher than same maturity treasuries. That's often true in a period where treasury rates went up, but then stabilized and started going back down. Because the market for CD rates is not efficient. Best CD's are sometimes a much better deal than treasuries risk for risk, other times they're not (though you have to factor in tax differences and the right to withdraw on some CD's with penalty, which can be a valuable interest rate option).
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