Posted on: Wednesday, December 12, 2001

Low-risk savers find yield lower, too

By Hal Mattern and Jodie Snyder
Arizona Republic

That giant sucking sound we've been hearing for more than a year has been the air coming out of savings yields.

In an effort to shore up the economy, the Federal Reserve cut interest rates again yesterday — the 11th reduction since Jan. 1. Some economists, bond-market watchers and other professional investors predict it could be the last or next-to-last cut for a while.

"The next major move in interest rates will be up, not down," predicted Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Sohn estimates that the 10 rate reductions before yesterday will translate into 2.5 additional percentage points of economic growth next year.

In the meantime, the Fed's maneuvers have had a more noticeable impact on short-term borrowing costs, to which deposit yields are pegged. Yields have dropped across the board on the most risk-averse instruments: everything from certificates of deposit and money market mutual funds to U.S. savings bonds.

One-year CDs, for example, had slipped to 2.21 percent on average before yesterday's cut, from 5.37 percent at the end of 2000, according to Bankrate.com in North Palm Beach, Fla.

Consequently, many savers are feeling the pinch.

Greg McBride, a financial analyst at Bankrate.com, recommends that savers roll maturing CDs into certificates coming due in six months or less, so the proceeds can be reinvested at possibly higher yields around the middle of next year. "We think a yield rebound is likely," he said.

In addition, savers would be wise not to turn a blind eye to common sense even when shopping among low-risk instruments, advises Mark Sendrow, director of the securities division of the Arizona Corporation Commission.

"Be careful when someone's offering CDs at yields 1 or 2 percentage points higher than they're being offered elsewhere," he said.

Mark Stein, a certified financial planner at Aegis Financial and past president of the Financial Planning Association of Greater Phoenix, agrees that it's probably best for risk-averse investors to stick with CDs rather than move into more venturesome areas. But he points out that the lower yields facing savers underscore the wisdom of diversifying into investments such as bonds and stocks.

Although stocks in particular get a bad rap for short-term price swings, they have a better record of holding their real values over time.

"If you include the impact of inflation and taxes, (risk-averse) investors right now are getting crushed," he said.