Where Has All The Yield Gone?
Wait...My rate can change?
Everyone’s #1 goal is to keep their corporate cash safe, but in 2020 you get little to no yield on those assets. Your bank is likely showing you a rate hovering around 1%, but is that truly the return you will receive?
Corporate asset managers are always hunting for the highest yield possible, however, they sometimes gloss over the details of that juicy number. When our prospects and customers show us their favorite bank’s offering, we always ask if they have read the fine print. As always, the devil is in the details.
Banks are great, but one must understand the true function of that above-market interest rate. It is offered to help the bank open new deposit relationships or receive more deposits from existing customers. In the old days, it was called a teaser. Banks would post their savings and CD rates in the newspaper, and you would go down to the bank and open an account to deposit the money. They would even sweeten the deal by giving you a toaster or a new color TV.
These days, information is everywhere. You can find and open an account with the highest yield from the comfort of your home. But no longer do you lock that rate in for the long term. And no toaster either. What most do not realize is that these advertised rates come with a caveat that states,
“Rates are effective on this date and are subject to change at any time before or after account opening.”
To understand why that happens, one needs to understand what a bank does with your money.
First, they purchase fixed-income assets so they receive a definitive amount of interest on your money. Typically these are US government securities.
Second, they use your deposits to make loans to other people, like lines of credit, auto loans, or mortgages. They’ll charge a higher interest rate than they pay you on your deposits, pocketing the difference as profit. This is called net interest income.
Hey, no harm no foul. A bank is a business. But why do those advertised rates drop?
If the bank is deploying the bulk of their deposits to purchase fixed-income assets like US government securities, their offered rates will closely track those of US government securities, and will trend lower over time as they need to make money via the “net interest margin.” Most recent net interest margin for J.P. Morgan is 2.2%, Bank of America is 2.5%, and Silicon Valley Bank is 3.7% (source: Bloomberg 4/29/20).
US Treasury-bills were yielding over 1% a few quarters ago, and today they are yielding below 0.25% after the Federal Reserve slashed rates. This means banks and money market rates have to adjust lower as well. Recently, two of the largest money market fund providers, Fidelity and Vanguard, stopped accepting new investor dollars for this exact reason (source: Reuters , Vanguard). Not all money market funds are alike and some of them are actually quite risky, stay tuned for a more detailed post on that in the near future.
Due to recent uncertainty and turmoil in the market, demand for the safety and security of US government securities has skyrocketed, thus driving yields down to near 0. Fidelity and Vanguard have had to purchase these securities at lower and lower and sometimes negative yields! Ultimately, rather than continue down this path, they decided to stop taking new money in order to protect those already invested.
Your preferred banking partner is likely in the same boat as Fidelity and Vanguard. This is likely why your rates have dropped and may continue to do so.
InterPrime is different. We are an SEC-registered Investment Advisor, not a bank. This means that we are not beholden to the same mechanics as a money market fund or banking institution. Additionally, unlike most banks and brokers, we have a fiduciary responsibility to our clients, which legally obligates us to put your interest above ours.
We are building InterPrime to be your cash management and treasury department as a service. Get in touch to learn more and receive a free and unbiased cash management review!