Current Savings Rates Will Rise in 2014 Along With Bond Yields

Current savings rates which are still just above record lows will start rising next year due to a stronger economy and the Federal Reserve. The economy has been trudging along for many years now. We have had several years of growth after the "Great Recession," but not enough to lower the persistently high unemployment rate.

Current Savings Rates Will Rise in 2014 Along With Bond YieldsThe economy has been aided by the Federal Reserve's actions to drive interest rates to record lows in order to spur economic growth. The economy has hit a bump recently thanks to both parties in Washington not being able to come to agreements on important fiscal policies.




In fact, the advance estimate for fourth quarter Gross Domestic Profit (GDP) showed an economy that contracted 0.1 percent, mainly due to investors and consumers wondering how Republicans and Democrats would deal with the expiring Bush tax cuts.

Thankfully, a last minute deal was reach between both parities but not before some damage was already done to the economy. The fourth quarter GDP didn't contract, the second estimate in fourth quarter GDP showed the economy expanded 0.1 percent. I firmly believe growth would have been higher if it wasn't for all these fiscal decisions being made at the very last minute.

The most recent fiscal log jam in Washington was sequestration, the automatic
across-the-board spending cuts by the federal government. Sequestration hit March 1 but the impact on the economy is yet to be known, though most economists believe it will take a 0.5 percent hit to GDP in 2013.

When you already have an economy that is underperforming and is expected to only grow at 2.00 percent in 2013, a 0.5 percent bite in GDP growth will be felt. Economists also believe 500,000 jobs will be lost due to the sequestration. The last piece in the fiscal puzzle is funding the government for the coming fiscal year. At least both parties agree to raise the debt ceiling to fund the government until September 2013.

This brings us back to bond yields and interest rates. When Washington is finished creating so many obstacles for the economy's growth, it should start taking off. A stronger economy will send interest rates and bond yields higher but the fed will also have a hand in forcing interest rates and bond yields higher.

The fed has accumulated just over a $3 trillion dollar balance sheet that it has to start unwinding (selling). Once the fed starts selling Treasuries, yields will move higher. Many believe yields will start moving higher before the fed sells Treasuries because investors will anticipate the fed selling and sell before them.

All of these market forces will eventually send savings rates and other deposit account rates higher. Right now the best savings rates at credit unions and banks are just above 1.00 percent and we could start seeing rates move higher in 2014.
 
Author: Lisa Graham
March 6th, 2013