Goodbye to High-yield Savings Accounts

Goodbye to High-yield Savings Accounts

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For years, the high-yield saving products were a success for both consumers and financial institutions alike. After getting almost Zero interest from big US banks, individuals who parked their excess cash with the likes of Ally Financial Inc., Barclays Plc, Goldman Sachs Group Inc.’s consumer bank, Marcus, or HSBC Holdings Plc’s HSBC Direct were suddenly bringing in a comparatively bountiful 2% or more around this time last year. At that point, the Fed had raised its short-term interest rate for what would be the last time this cycle in December 2018. 

The rest is History.

1st, the Fed felt compelled to lower interest rates 3X from July through October to offset the economic impacts from The Trump Administration’s trade wars. That brought prevailing high-yield savings rates close to the Fed funds rate. And yet, in early Y 2020, Marcus users could still lock in that 2% number by opting for a no-penalty CD.

Then the C-19 coronavirus happened.  

Goldie’s Marcus announced the cut to its savings rate on 8 May with this message:

“Effective today, the rate on our Marcus high-yield Online Savings Account has been adjusted down to 1.30% from 1.55% APY. We understand that this is not welcome news. During this unprecedented time, please know that the rate on our Marcus Online Savings Account remains highly competitive with an APY that’s still 4X the national average. You can rest assured that we continue our commitment to providing value and helping your money grow.”

“For a guaranteed return, consider adding a fixed-rate No-Penalty CD. You will earn a high-yield rate with the flexibility to withdraw you balance beginning 7 days after funding. Our 7-month No-Penalty CD currently earns 1.55%.

The marketing is Top-notch.

1st, it’s transparent about being bad news, but then quickly pivots to play up that Marcus still provides comparatively more interest than accounts at Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. The announcement also wastes no time suggesting a no-penalty CD to make up for the lost interest and, in a benefit to Goldman, create a “stickier” deposit. 

Whether Ally, Barclays, Marcus or HSBC are the answer to that is an open question. As it stands, these interest rates barely cover the market-implied inflation rate over the next 10 years.

That is by design, of course, the Fed cuts rates in part to encourage borrowing and purchases of riskier assets, both of which boost the economy more than parking cash in a high-yield savings account.

Stocks look detached from the current economic reality.

Future interest rates on high-yield savings accounts are on equally shaky ground. While there is not much in the way of precedent to call on, it is safe to say they will continue to offer more than the rock-bottom rates on money-market funds.

Banks will probably do whatever they can to delay going below 1%, a round number that could be the last straw for some individuals. Other than those parameters, though, anything is possible. Such is life at the Zero lower bound.

Click here for our simple explanation of the economics of negative interest rates.

Wednesday, the US major stock market indexes finished at: DJIA +369.04 at 24575.90, NAS Comp +190.67 at 9375.80, S&P 500 +48.67 at 2971.48

Volume: Trade on the NYSE came in at 921-M/shares exchanged

  • NAS Comp +4.5% YTD
  • S&P 500 -8.0% YTD
  • DJIA -13.9% YTD
  • Russell 2000 -19.3% YTD

HeffX-LTN’s overall outlook for the major US stock market indexes is Bullish to Very Bullish in here.

Looking Ahead: Investors will receive the weekly Initial and Continuing Claims report, Existing Home Sales for April, the Philadelphia Fed Index for May, and the Conference Board’s Leading Economic Index for April Thursday. 

Have a healthy day, Keep the Faith!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge. Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.