Bank Rates if the U.S. Defaults on Its Debt? - Bank Deals Recap for Week Ending July 23, 2011

It looks like we are getting closer to a debt ceiling crisis. How will this affect deposit rates? Two weeks ago Miranda discussed some possible consequences if the US defaults on its debt. She quoted an economist from the WSJ who said:

The main impact on markets would come from sharply reduced liquidity in the U.S. Treasury market, as financial firms’ procedures and systems would be tested by the world’s largest debt market being in default.

As noted by this WSJ article, a worst case scenario would be something like what happened in the 2008 financial crisis after Lehman Brothers' collapse. It should be remembered that the 2008 financial crisis sparked the recession and the high unemployment that we have yet to recover from. If there's another crisis that causes a new recession and higher unemployment, bank deposit rates will likely stay low for many years to come.

However, if the crisis sparks higher Treasury yields, won't that push deposit rates higher? When banks have more deposits than loans, they do invest in conservative investments like Treasuries. When Treasury yields are higher, that should allow them to offer higher deposit rates. The impact of banks' investment portfolios was described by one credit union early this year. However, I have a feeling banks won't be in a rush to raise deposit rates especially if there's a financial crisis. I think we'll need to see sustained loan growth for higher deposit rates. That will only happen with economic growth, not a financial crisis. Without economic growth, the Fed will be in no hurry to hike rates even if the dollar falls and inflation rises.

Even though it might look like we're getting close to a debt ceiling crisis, many are predicting a last minute resolution. I've seen investment and economic bloggers give their opinion that this crisis is just a dog and pony show and a charade. As described in the Calculated Risk economic weekly summary:

As expected, no deficit reduction deal was reached, and we have now arrived at the final act. My guess is a deal will be reached to raise the debt ceiling, there will be a filibuster in the Senate, the House might reject the deal once, and then it will finally pass.

If you were considering making big changes to your bank and investment portfolios before August 2, you may want to think twice. Allan Roth in his CBS Money Watch blog had this to say:

Investing is a long-term proposition and the more we speculate in the short-term, the lower our returns are likely to be. I personally don’t believe we will be showing up at the supermarket to buy groceries with gold. Thus, I’m sticking with my balanced portfolio of mostly index funds and CDs.

For the last few months, we have not seen worries of the U.S. default impacting Treasury yields. That may be changing. Treasury yields did rise this week, but the increases were small. We may see more increases on Monday due to the political impasse that was highlighted late Friday. The details of the higher Treasury yields and the increased expectations for Fed funds rate hikes next year can be seen below. These numbers are based on Yahoo bond rate data and the CME Group FedWatch.

Treasury Yields:

• 5--year: 1.51% up from 1.44% last week
• 10-year: 2.96% up from 2.91% last week
• 30-year: 4.26% up from 4.24% last week

Fed funds futures' implied probability for a higher rate by:

• Apr 2012: 30.0% up from 26.2% last week - 26.2% down from 27.5% last week
• Jun 2012: 32.3% up from 28.7% last week - 28.7% down from 46.2% last week
• Dec 2012: 67.6% up from 63.4% last week - 63.4%

Savings Account Rates

Savings account rates were pretty steady this week. In my list of the top rates, there was only one rate cut. Hudson City Savings Bank reduced its internet savings account rate from 1.05% to 1.00% APY.

I would like to say that we are at the bottom, and rates will only rise, but I'm not so sure. It has been over 30 months since the Fed last cut the Fed funds rate to near zero. As we have seen this year, deposit rates continue to fall.

The best rate without any promotions or bonuses continues to be at Incredible Bank which is offering 1.25% APY on its money market account for balances between $100K and $250K. For those with smaller balances, Incredible Bank's internet checking account rate is very close at 1.21% APY for all balances up to $250K.

My main concern with Incredible Bank is that it's a small bank with only $799 million in deposits. That's not a lot for a bank that takes deposits nationwide. As a comparison, ING Direct has $81 billion in deposits. That's more than 100x larger.

ING Direct's savings account rate is only 1.00% APY, but you can get 1.15% APY on its Electric Orange Checking account for balances of at least $100K. There's no guarantee that this rate will hold, but it's possible that ING Direct may hold off on rate cuts to avoid any negative perceptions that the pending Capital One acquisition is already hurting ING Direct customers.

Rate Hikes:

1. None

Rate Cuts:

1. Hudson City Savings Account - 1.00% (was 1.05%)

Certificate of Deposit Rates

My recap of CD rate changes and the list of CD deals will now be in my Friday surveys of the best CD rates. My Saturday recaps will now focus on banking news of the week and liquid accounts.

Reward Checking Accounts

As I mentioned last week, with the CD rates and discussion being moved to my Friday post, I thought this would be a good time to expand my listing of reward checking accounts. I'll just highlight a few of the top reward checking accounts that are nationally available. You can refer to our reward checking table to see all of the nationwide and local rates.

There was only one change to the short list of nationally available reward checking accounts that offer at least 2.00% APY on balances of at least $10K. Avidia Bank's eChecking rate fell below 2.00% APY this week which takes it off my list. Its top rate fell from 2.27% APY to 1.87% APY for balances up to $25K. I was going to check if Avidia Bank was still accepting new customers nationwide instead of just in its market area in MA. As we have seen many times this year, cutting back on nationwide availability has been common. I don't feel too bad about forgetting to check now that their top rate is below 2.00%. I

If you're new to reward checking, my recent post, 10 Common Traits of High-Yield Reward Checking, should come in handy.

Recap for the Week - Links to This Week's Posts

Banking News/Resources

• Regulators Close 3 Banks in Florida & Colorado
• New Bank or Just a Name Change? Aurora, Ally, OneWest & Alostar
• BillGuard Review - Free Service to Monitor Credit & Debit Card Transactions

Savings/Checking Accounts - Nationwide

• Update on Ally's Bank-to-Bank Transfers
• Business Checking Accounts Can Now Pay Interest

CD Deals - National

• Survey of the Best CD Rates for July 22, 2011
• New Higher CD Rates at Bank of Internet - Available Nationwide

Checking/Savings/CC Bonuses

• Southwest Airlines Rapid Rewards Premier Credit Card Bonus Review
• $100 Free Checking Account Bonus at Members Advantage Credit Union in NW Indiana - Local Only

Reward Checking Accounts

• No new posts this week

CD and Money Market Deals - Local

• High-Yield Savings Account Continues at Dollar Bank in PA & OH - Local Only
• Top CD Rates in Pennsylvania at Police & Fire Federal Credit Union - PA Only
• Top CD Rates in Louisiana - Jefferson Financial & Other Credit Unions - Local Only
• Special 6-Month CD Rate at Texas Leadership Bank - Local Only

Posts from Previous Weeks

• Archive of 2011 Posts

The rates listed below are based on Annual Percentage Yield (APY). No minimum balances are required unless noted. MMA next to the rates indicate a money market account. Most MMAs have check writing and ATM cards. Online savings accounts usually lack both of these. Previous weekly summaries are available at this page.

Rates as of July 23, 2011

Checking/Savings/Money Market Accounts:

• Best Savings Account Rates (Nationwide & by State)
• Best Money Market Rates (Nationwide & by State)
• Best Checking Account Rates (Nationwide & by State)

• How to View Rates for Your State

• Noteworthy Accounts Available Nationwide:

• Capital One/Costco - 1.26% InterestPlus Savings ($10K min, includes 10% quarterly bonus) 1.15% (w/o bonus) account review
• MyBankingDirect - 1.25% (min $5K) promo rate
• AmTrustDirect - 1.25% (min $10K, max $150K) promo rate
• Incredible Bank - 1.25% MMA ($100K min) 1.15% (under $100K) account review
• Incredible Bank - 1.21% Checking ($1K min) account review
• Capital One - 1.20% InterestPlus Savings ($10K min, includes 10% quarterly bonus) 1.10% (w/o bonus) account review
• SFGI Direct - 1.16% (min $500 to open) account review
• ING Direct - 1.15% ($100K) 1.10% ($50K) Electric Orange Checking
• CNB Bank Direct - 1.15% account review
• Alliant Credit Union - 1.15% (min $100) account review
• Discover Bank - 1.15% Savings (min $500) account review
• airbanking.com - 1.10% Savings
• Clear Sky Accounts - 1.10% (max $250K) account review
• SmartyPig - 1.10% (min $25, max $50K) withdrawal restrictions, account review
• Sallie Mae Bank - 1.10% (Upromise rewards) account review
• Colorado Federal Savings Bank - 1.10% ($2.5K min) account review
• Ally Bank - 1.04% MMA account review
• EverBank - 1.01% MMA ($5K min)
• American Express Bank - 1.00%, account review
• ING Direct - 1.00% Orange Savings
• Hudson City Savings Bank - 1.00% (min $2.5K)

Reward Checking Accounts:

• Best Reward Checking Account Rates for a $10,000 Balance - Nationally Available
• Best Reward Checking Account Rates for a $25,000 Balance - Nationally Available

• How to View Rates for Your State

• Noteworthy Accounts Available Nationwide:

• Consumers Credit Union - 4.09% (up to $10K) 1.59% ($10K-$25K) 0.76% ($25K+)
• Lake Michigan Credit Union - 4.00% (up to $15K) 0.00% ($15K+)
• Atlantic Coast Bank - 3.01% (up to $15K) 0.50% ($15K+)
• ABCO Federal Credit Union - 2.52% (up to $25K) 0.00% ($25K+)
• Community Bank of Pleasant Hil - 2.51% (up to $25K) 0.50% ($25K+)
• Community Bank of Raymore - 2.51% (up to $25K) 0.50% ($25K+)
• Pacific Resource Credit Union - 2.27% (up to $15K) 0.61% ($15K+)
• Provident Credit Union - 2.26% (up to $25K) 0.31% ($25K+)
• First New England Federal Credit Union - 2.03% (up to $15K) 0.25% ($15K+) (extra 1% w/relationship)
• Connexus Credit Union - 2.00% (up to $25K) 0.50% ($25K+)

Certificates of Deposit:

• Best CD Rates (Nationwide & by State)
• Best IRA CD Rates (Nationwide & by State)

• How to View Rates for Your State

• Survey of the Best CD Rates for July 22, 2011 (Nationwide & Local)

Various Deposit Account Deals

• Bank Deals Forum
• Checking/Savings Account Bonuses
• Best IRA CD rates, local and nationwide deals
• Latest CD and Savings Account Deals with No Major Deposit Limitiations

Bank Account Alternatives

• GE Interest Plus - 1.30% rate for $50k+
• Ford Interest Advantage - 1.25% rate for $50k+, Ford Interest Advantage review
• Vanguard Prime Money Market Fund - 0.03% 7-day yield
• Vanguard Tax-Exempt Money Market Fund - 0.01% 7-day yield
• Fidelity Money Market Fund - 0.01% 7-day yield (reviews on Fatwallet)
• Fidelity Municipal Money Market Fund - 0.01% 7-day yield
• TIAA-CREF Money Market Fund - 0.00% 7-day yield
• PayPal Money Market Fund is closing effective 7/29/11
• FW Thread on Treasury Bills
• I Savings Bonds for 2011, I Bond Article, I Bonds as CD Alternatives

Historical Rates from the Federal Reserve (Federal funds, Treasury bills, CD's)