Downgrade Reaction: How Will It Affect Bank Rates?


NEW YORK (MainStreet) -- These are perilous times for investors in general, but what about bank deposit investors?

You can’t blame bank deposit consumers for lacking confidence. First Standard & Poor’s downgrades the U.S. debt for the first time in history, then credit agencies take their chainsaws to Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE), downgrading their ratings early Monday.

What’s a bank deposit investor to make of it all? Bank lending rates are still declining. Nobody seems to know why, but mortgage rates are in decline, and not in growth momentum, following Friday’s debt downgrade. The BankingMyWay Weekly Mortgage Rate tracker looks like his today:

  • Description                             This Week                   Last Week
  • One-Year ARM                       3.699%                        2.836%
  • Three-Year ARM                     3.177%                        3.291%
  • Five-Year ARM                       3.246%                        3.402%
  • 15-Year Mortgage                    3.729%                        3.942%
  • 30-Year Mortgage                    4.579%                        4.747%

In a nutshell, mortgage rates aren’t rising (with the exception of the one-year ARM), as the conventional wisdom stated in the immediate aftermath of the debt downgrade. That should reassure homebuyers and sellers who need low rates to get a home sale done in an otherwise tough market.

Investors aren’t unloading Treasuries. Here’s another gem from the conventional wisdom front: The smart money said that once bond traders got their meat hooks into Treasuries today, bond prices would fall, thanks to the debt downgrade. But investors are still buying into the 10-year Treasury, which clung to a rate of 2.46% in mid-morning Monday trading. With bond prices high and yields low, that spells trouble for bank rate investors, as bank rates are normally tied to the direction of Treasury rates. Keep an eye on that 10-year Treasury rate – if the rate goes down (and it’s at its lowest levels since October 2010 already), expect bank rates on things like certificates of deposit to go down, too,

A lot depends on China. The big elephant in the room is China. If the Chinese ever pulled the plug and sold big chunks of their U.S. Treasury portfolio, it would be mass hysteria. But that’s not happening. As long as China opts to keep its huge positions in the $9.3 trillion U.S. Treasury markets, bank interest rates should remain relatively stable. Or at least as relative as possible given the wild swings in the global financial markets right now.

So the real story is the “status quo” environment in U.S. bond prices, and subsequently, with bank interest rates, too. So while CD rates are up slightly today, and mortgage rates are in decline, it’s hardly a day of wild change in the bank interest rate market. And that's a good thing.

—For more information about what the bond market means for you, visit MainStreet’s “Bonds” topic page for our latest coverage!

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