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Handling Today's Diverging Bank Rates





There are days when you can clearly see which way the wind is blowing. And then there are days when the weather vane twists in a new direction with each gust.

Trying to spot a trend in interest rates lately is like trying to gauge the weather on one of those days when the wind is swirling unpredictably. The signs are pointing in different directions, meaning consumers have to adopt different interest rate strategies depending on what they want to accomplish.

Some rates rise while others fall

Here are some of the apparent conflicts in recent interest rate developments:

  1. Mortgage rates have risen while CD rates have fallen. From the end of December to mid-March, 30-year mortgage rates rose by 28 basis points. Meanwhile, five-year CD rates fell by 7 basis points.
  2. Long-short spreads have widened for mortgages, while shrinking for deposit rates. Over that same period, the spread between 30-year and 15-year mortgages widened by 14 basis points. Meanwhile, the spread between five-year CD rates and savings account rates narrowed by 7 basis points.
  3. Credit card rates have largely sat out the lower-interest rate trend. Less up-to-date information is available for credit card rates, but it is the longer-term trend that stands out for those rates. While mortgage and deposit rates have fallen steeply in recent years, credit card rates have declined by just 61 basis points since 2008.

So, are interest rates rising or falling? Right now, it depends on where you look.

How to play the conflicting rate signals

Interest rate trends can influence people to borrow or save, and they can also favor short-term or long-term strategies. Given the somewhat conflicting interest rate signals of late, your approach needs to be very specific to your situation. Here are some examples:

  1. Go short on deposits. With long-term CD rates collapsing ever closer to savings account rates, the reward for committing to long-term deposits is shrinking. At the same time, with rates generally so low, the potential opportunity cost of locking into today's rate levels is worrisome. Savings account rates may be lower than long-term CD rates, but the risk/reward trade-off is in their favor.
  2. Also go short on mortgages. Under most interest rate conditions, you'd expect a borrowing strategy to be the opposite of a deposit strategy, meaning when it made sense to go long on one, it would typically make sense to go short on the other. However, with spreads between 15-year and 30-year mortgages widening, this could be a good time to consider a shorter-term mortgage along with short-term deposits.
  3. Mortgage borrowing is good, while credit card borrowing is not. Don't let the recent rise in mortgage rates throw you off: Based on the longer-term trend, today's mortgage rates are still incredibly low. Not so with credit card rates: Their minimal participation in one of the greatest interest rate declines in history makes them unnaturally high relative to other interest rates.

For about five years now, the trend in mortgage rates and bank rates has been fairly consistent: Both have fallen steadily. Now, with some mortgages and bank rates going in opposite directions, and with short- and long-term rates behaving differently, consumers have to keep a closer eye on the specifics to manage their interest rate decisions properly.

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