Moving funds from CDs into checking accounts, money market deposit accounts; poised to get back in the market?
A combination of low interest rates on long-term investments and investor aversion to risk has triggered a shift in where clients are putting their funds.
Simply put, consumers are avoiding tying up their cash for any length of time. According to an analysis of the Federal Reserve's most recent Flow of Funds report by consulting firm Moebs $ervices Inc., consumers are steering clear of certificates of deposit and money market mutual funds. Instead, they're funneling the funds into shorter-term investments such as checking accounts and money market deposit accounts.
“The basic retail investor is kind of being thrown into a conservative position,” said Michael Moebs, economist and chief executive at Moebs. Investors “are not getting a decent rate for long-term investments. Why take a chance on 5 or 10 basis points?”
The low rate on longer-term CDs is being driven in part by bank efforts to reduce long-term deposits to increase capital-to-asset ratios, Mr. Moebs said.
Retail and jumbo certificates of deposit fell to 22.4% of total deposits in 2010, from 31.7% in 2007. Likewise, all types of money market mutual fund deposits fell to 23% of total deposits in 2010. That's down from 26.2% in 2007.
Meanwhile, checking account deposits increased from 5.2% of deposits in 2007 to 7.7% in 2010, and money market deposit accounts rose from 33.5% in 2007 to 43.9% in 2010.
The total of insured and uninsured deposits dropped $800 million, to $12.3 trillion at the end of 2010, from $13.1 trillion in 2007, an effect of the recession and reduced earnings by workers, Mr. Moebs said.
Of note, the shift in the types of deposits has seen $1.48 trillion go into money market deposit accounts — and out of the stable types of deposits that banks use for lending. That, in turn, has caused banks to cut back on their loan portfolios, according to Mr. Moebs.
Some of the cash that once went into market mutual funds and certificates of deposit is probably being invested in stocks and bonds, Mr. Moebs noted. But he also said the sharp increase in money market deposit accounts suggests that a sizable amount of investors are taking a wait-and-see-approach to the stock market.
