Cautious investors are pouring money into a bank deposit account even though yields remain near zero and could go even lower.
The current economic environment is prompting more Americans to save despite record low interest rates that are keeping bank deposit account yields below 1 percent and threaten to drive them below zero.
Investors have been holding a significant amount of cash in a bank deposit account throughout the economic downturn, and many have increased these holdings in response to recent stock market volatility and debt crises in the United States and Europe, according to Millionaire Corner research.
At the end of 2010 Millionaires held up to 12 percent of investable assets in a bank deposit account, but an August survey shows that 14 percent of Millionaires moved additional investments into cash in response to the most recent market downturn and growing pessimism about the U.S. economy. More than 60 percent of investors surveyed in August expressed concern about the possibility of a further downgrade of the U.S. credit rating.
The average return on a bank deposit account is close to zero, and some economists fear rates on certificates of deposit – now around .76 percent for a one-year CD – could fall into negative territory. That means banks would charge investors for merely holding their money.
“Sure, they’ve been a fixture in countries like Japan and China, but the idea that a U.S. deposit account would require a customer to actually pay them a fee to hold onto their money probably seems beyond the pale to a lot of people,” says Bankrate.comcontributor Claes Bell.
Research from Market Rates Insight indicates that negative interest rates, or “cost reversal,” may be closer that investors realize, said Bell. Record low interest rates put interest on deposits on a collision course with interest from loans. The average overnight mortgage rates quoted by Bankrate today are 4.15 percent for a 30-year fixed-rate mortgage and 3.36 percent for a 15-year fixed-rate mortgage.
“If you have a ton of people putting money into deposit accounts and nowhere for the banks to achieve adequate returns on those deposits sufficient to pay interest to investors, then the result is negative interest rates,” said Bell. “It happened in Japan when it was in a liquidity trap and it very well could happen here.”