Why Rising Interest Rates Aren't Being Passed Along to Savers

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Interest rates in the bond market have risen dramatically this year, which has left borrowers shopping for mortgages or car loans facing higher financing costs.

But here's the paradox: Even though rising rates have made it more costly to borrow, savers haven't seen much improvement on the interest rates they're getting on savings account balances and bank certificates of deposit.

Rates on Savings Have Barely Budged

In the money-market account category, savers have actually seen the rates they get paid fall, despite the run-up in bond-market rates. Average rates have fallen from around 0.50 percent this time last year to 0.40 percent currently, according to Bankrate.

Looking at the average isn't always the best indication of the rates available, as it includes offerings from stingier banks that you'd want to avoid in any event. But even among banks paying the best rates on money-market accounts, it's hard to find any bank offering more than 1 percent. General Electric's (GE) GE Capital Bank and CIT's (CIT) CIT Bank both weigh in at 0.90 percent, while Ally Bank and American Express (AXP) Bank currently pay 0.85 percent.

CD Rates: Better But Still Bad

On the CD front, savers are faring a little bit better. After having fallen as low as 0.5 percent earlier this year, rates on one-year CDs have bounced back to about 0.7 percent. That's still below where they were in late 2012, though, and top rates from GE and other banks only fetch about 1.05 percent.

Even if you're willing to lock up your money for a longer period of time -- five years -- banks are still pretty tight-fisted, with rates averaging 1.35 percent. That's up only slightly from mid-year lows around 1.15 percent. Although a few outliers will top the 2-percent mark, five years is still a long time to lock in rock-bottom savings rates -- especially when five-year CDs paid well over double that rate before the financial crisis.

What's Behind the Skimpy Rates?

Savers aren't benefiting from the rise in interest rates for a couple of reasons.

First, although rates in the bond market have gone up, the biggest increases have been for long-term bonds with maturities of between 10 and 30 years. Those long-term securities are the ones that have traditionally been least under the control of the Federal Reserve, and market participants expect that the Fed will loosen its grip on long-term rates long before it starts to push short-term rates higher. Because the Fed is still firmly committed to low short-term rates, Treasury bills and other short-term investments are still paying even lower rates than what the best banks will offer their customers.

Second and perhaps more importantly, savers have been willing to take whatever income they can get on savings, with many perceiving the alternatives as being too risky. Stock markets have risen to new record highs, making many savers fearful that moving money from savings accounts into stocks now could end up costing them if there's a market correction. Meanwhile, bond funds that concentrate on longer-dated income investments have dropped considerably in value this year, as higher rates have hurt the value of their existing investments and have created negative returns for surprised conservative investors.

When Will Rates Rise?

Unfortunately for savers, most analysts expect Janet Yellen, the nominee to take Ben Bernanke's place as chair of the Federal Reserve, to keep interest rates low for a considerable period. Until the Fed moves short-term rates higher, most banks won't feel much pressure to raise the interest rates they offer. So unless savers start voting with their feet en masse, they probably won't see considerable increases in income anytime soon.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. He doesn't own shares of the stocks mentioned in this article. The Motley Fool recommends American Express. The Motley Fool owns shares of General Electric.

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