ALSO
- Leckey's Q&A
Successful Investing
Surprise!
CDs and Savings
Bonds Are Back in Vogue
by Andrew Leckey
The
"good old days" are back.
Today's investors are
conservatively stashing money into bank certificates of deposit
with an average yield of around 2 percent, boosting payroll deductions
for Series EE Savings Bonds that pay just under 4 percent and
refinancing mortgages at just over 6 percent.
Welcome to 1966. Everyone's
keen on anything that won't lose money and could help mend their
finances in the wake of some painful stock market losses.
Our memory of the constant
ebb and flow of interest rates usually lasts about six months,
so we must remind ourselves that nothing is forever. A realistic
strategy is to carefully track interest rate movements and make
informed decisions based on where the economy seems likely to
shove them next.
Here are recollections
of a high rate environment:
A boastful codger in
the late 1970s told several of us whippersnappers as we sipped
morning coffee: "I've got myself a 10.5 percent mortgage.
Yes sir, 10.5 percent. You youngsters won't see one of those
again in your lifetime!"
While doing a story
on mortgages in the early 1980s, I sat in a family's suburban
living room as they discussed refinancing their 16 percent mortgage.
Mom explained, "Refinancing to 14.5 percent is going to
make our budgeting and our life much more manageable."
The passing of an elderly
relative in the mid-1980s meant his personal accounts had to
be closed out at various financial institutions. A daylong trek
from one tiny savings and loan to another made it evident he'd
been a master at the CD rate game, hunting down the best 11 and
12 percent returns wherever they might be as each certificate
came due.
Today's low-rate era
is built on entirely different logic. The one-year CD is a hot
product even though it was recently paying just under 2 percent,
tying the record low set in 1985.
"Investors have
become more concerned with preserving capital than the return
they're earning," observed Gregory McBride, financial analyst
with Bankrate.com in North Palm Beach, FL. "Two years ago,
when CD yields were at five-year highs, the stock market was
going great guns and there wasn't investor demand for CDs."
The good news is that
even though yields are low, inflation is so low that real returns
aren't much different than a couple of years ago when yields
were higher, McBride noted.
U.S. savings bonds
are also popular, but you must understand the different types.
Series EE savings bonds
have a current rate of 3.96 percent that last until Oct. 31.
The rate changes each May and November for your bond. Interest
paid is 90 percent of the average of prevailing market yields
on five-year Treasury marketable securities. They're purchased
for half of face value; earn interest for 30 years from their
issue date; can't be cashed in until six months after issue;
and have a three-month penalty for cashing in before five years.
"The reason the Series EE bond is the better deal is that it has averaged 2.6 percent above inflation, while the Series I bond is offering 2 percent over inflation," summed up Daniel Pederson, president of the Savings Bond Informer (www.bondhelp.com) in Detroit, MI.
Besides taking advantage of the lowest mortgage rates since 1966, homeowners are refinancing to take equity out of homes that have appreciated in value or to shorten their loan period to 15 years (at a record low of around 5.5 percent). Reduced expectations for future investment returns also make lower-rate and shorter-term mortgages attractive.
"We expect that 30-year mortgage rates will stay in the 6.3 percent to 6.4 percent range through yearend," predicted Douglas Duncan, chief economist for the Mortgage Bankers Association of America in Washington, D.C. "They'll gently increase over the course of 2003, averaging about 6.75 percent for the full year."
You should therefore be able to get a good refinancing deal through the end of this year, he believes, despite some rate bounces tied to economic reports.
"To amortize the cost of refinancing, you should probably be planning to keep the house no less than five years and get a rate a full percentage point lower," advised Harold Evensky, certified financial planner with Evensky Brown & Katz in Coral Gables, FL. "However, it's a personal decision and if you have a rate of 8 percent and can get 6.5 percent, it might be worthwhile even for a short time."
Banks are feeling effects of the refinancing boom.
"If a bank is an originator of mortgages, it helps increase loan volume growth," explained Jennifer Thompson, bank analyst with Putnam Lovell NBF in New York. "But if a bank also services the mortgage loans for itself or others, a declining rate environment is negative because the value of its servicing portfolio declines."
Big mortgage originators benefiting from recent refinancing include Wells Fargo (WFC), National City (NCC), SunTrust Banks (STI) and Wachovia (WB), concluded Thompson.
Editor's Note: Read Andrew Leckey's column, "Successful Investing" in each issue of The Bull & Bear Financial Report.
