The yield starvation diet for American investors is over.
Investors who quit products with ultra-low yields are hungry again for certificates of deposit and money market funds as interest rates surge to levels unseen since 2011.
The shift in gravity on interest rates represents a return to normalcy after nearly a decade of rock-bottom yields.
"Cash investors have been numb to yields," said Pete Crane, president of money fund research firm Crane Data. "This money sensitivity to yields is slowly dawning."
In the second quarter, bank deposits switched into higher-rate accounts at a 15.6 percent annual rate, up from 9.6 percent historically, according to data gathered by Novantas, a bank consulting firm. The rate of switching will likely reach 20 percent, it said.
Many accounts have a long way to climb. As of June, 65 percent of savings account balances pay no more than 0.25 percent, Novantas said.
The yield on the benchmark 10-year note on Thursday hit a 7-year high of 3.23 percent before closing at 3.19 percent. The Federal Reserve is ratcheting up interest rates as tax cuts and surging corporate profits have provided jet fuel for the U.S. economy.
Higher rates are good news for brokerages and investment managers as they once again pitch products that for years have yielded next to nothing. It also has opened a new opportunity for mutual funds that hedge against interest rate risk while boosting sales of fixed-rate deferred annuities.
The $6 billion Calamos Market Neutral Income Fund, for example, has attracted $1.3 billion in net deposits this year from bond investors jittery about the risks that come with rising interest rates, said Eli Pars, who runs the fund. Bonds prices fall when interest rates rise.
Fixed-rate deferred annuity sales are projected to rise up to 20 percent this year, and another 25 percent in 2019, according to the insurance industry group the Life Insurance Marketing Research Association (LIMRA).
"We believe fixed-rate deferred sales will have a strong second half of the year, based on the prospect of continued interest rate increases,” said Todd Giesing, annuity research director, LIMRA Secure Retirement Institute.
Meanwhile, investors are pulling money out of vanilla bank savings accounts, yielding less than half a percent, and pushing some of that dough into money funds with yields of more than 2 percent.
It is a boon for money fund providers that had been waiving a big portion of their fees so they could give investors some yield. Yields cratered to as low as 0.02 percent in 2014, a far cry from the 5 percent yields investors got in 2007 before the Great Recession.
"If you're transitioning to retirement, you are in a better position now," said Larry Glazer, managing partner of Boston-based Mayflower Advisors LLC. "People are getting paid a return that matches the inflation rate in safe haven assets."
Money fund assets are nearly $3 trillion, compared with $2.7 billion in 2011, according to Crane Data. Year-over-year flows from retail investors are up as much as 7 percent, Pete Crane said.
Meanwhile, money managers and banks are dusting off their marketing materials for CDs, money funds and Treasury bills.
Boston-based Fidelity Investments, for example, highlighted how $50,000 in cash can earn a three-year return of nearly $3,000 in a prime money fund account yielding 2 percent. A bank savings account yielding 0.2 percent would generate a three-year return of less than $400.
The threat of losing customers prompts some banks to pursue complex deposit pricing and marketing strategies in which they try to boost their rates enough to keep customers from getting restless without giving away the store. The banks are giving depositors a bigger share of each additional rate hike by the Fed.
To be sure, the banks are still coming out ahead with rising rates. They have raised their rates on all deposits by only about one-third as much as the Federal Reserve has raised rates this cycle, according to Novantas. With each additional hike they are giving up about half of the increase and that share may rise to about three-fourths.
"This normalization is long overdue," Glazer said. "It's shocking how low rates were."
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