'Deposit War to Get Tougher': A Look at What the Six-Month CD Reveals About the Market Ahead

03/12/2024 08:04 pm

LAKE FOREST, Ill.—Financial institutions are paying record-high rates on deposits and who the rate war is only going to get tougher as the year progresses, according to one economist.

To illustrate his forecast, Michael Moebs, economist and chairman of Moebs $ervices, said his company’s latest deposit study reveals almost 22% of all FIs are paying 5% or higher on a six-month CD.

“The riskless saver is now experiencing higher rates for their money than ever before,” said Moebs. “The six-month CD rate is the most dominant of all deposits rates—21.9% of all FIs are paying 5% or more on this deposit service. In the history of the United States this is extraordinary. Never before have so many FIs paid a maximum rate competing with Wall Street and Treasury options. With the basic saver who is riskless courting U.S. Treasury bills, more banks, CUs, thrifts and fintechs will start paying this maximum deposit rate to keep their deposits and not let these funds go to the Treasury.”

What Survey Found

Moebs said of those (3,628 institutions surveyed) paying 5% and above on six-month funds:

• 50.9% are banks
• 37.9% are CUs
• 11.2% are thrifts

Ten-year Treasuries paid 3.92% for 2023 and are now over 4% in 2024, Moebs noted.

“The competition between FIs for the six-month CD is based on who has the most capital to assets and highest assets per million per employee,” Moebs said. “In other words, it is a function of efficiency.”

Those states in the green are above the national rate and those in orange below the national rate.

A Big Shift

Moebs said the survey also shows that any term past 12 months falls to less than 4%.

He described the high six-month rates as a “big shift in how deposits are priced.” 

“Hard working Americans, from carpenters to clerks, bank a percentage of their paycheck along with teaching their kids to save chore money in piggy banks. Guess what? FIs now realize these folks have collected $10,000 to over $100,000 and the FIs are paying over 3.00% to save with deposits, not Treasuries,” said Moebs.

Interest checking, savings, and six- to 12-month CDs constitute 49.4% of money stock per the Federal Reserve’s Z1 reports and FI call reports, Moebs said. 

The Dominant Term

Moebs data show that today the “nationally dominant” financial service is the six-month certificate, with the average rate being 3.97%. Currently, the five-year Treasury note is 4.21% and averaged 4.26% for 2023.

Examining rates across the nation (see chart) Moebs data show the following:

• FIs paying market rates (green states) average 4.39%, while those below (orange states) average 3.29%
• Rates statistically differ by region:

3.94%  East 

3.58%  South 

3.73%  Midwest 

4.52%  Mountain 

3.60%  Pacific

“Will a user in Oregon with the lowest rate seek higher rates in Washington, Idaho, or Nevada? To do so is only a website click away,” noted Moebs. “Depositories with good capital and strong earnings will win in the long run.”

Advice Shared

Moebs said financial institutions paying rates that compete with bonds and the stock markets produce “fascinating strategic and tactical designs for deposits,” and offered observations and advice: 

• “One rate fits all for the entire service is gone. Tiered rates by deposit levels in one service are a given”
• “Multiple same service checking for military, student, and seniors is costly. One checking is enough”
• “Physical location is no longer the cornerstone of new consumers. Digital banking and websites are”
• “Great grandma may use physical checks but grandkids have plastic cards and they want market rates”
• “As deposit rates rise so does fee pricing because checking accounts need to be profitable”
• “High deposit rates force lower non-interest expenses. Pay fewer employees more”
• “Holidays push rates higher to have the consumer pay taxes on the interest 15 months later”

‘The Service is Price’

“Depositories sell services, and the service is price. Market rates for the saver who holds significant deposits are now normal in the post COVID world. Significant deposits start at $10,000,” said Moebs. “This results in marketing deposits differently. Tiering rates to reflect competitive interest rate markets is essential, along with: one service, digital services, profitable checking, an equilibrium of fees-rates-balances, lower non-interest expenses, and concern for the tax-paying saver are all vital elements of the right rate.