The economic shock from the coronavirus caused companies, consumers and investors to hoard cash like almost never before.
Many experts expect that urge to save to stick around for the long haul. And that should create strong demand for the safest fixed-income products, a force that could lend a hand to the Federal Reserve when it comes to suppressing yields as the government ramps up its supply of bonds to pay for economic stimulus measures.
Deposits at U.S. commercial banks have surged by 18% this year to a record $15.6 trillion, according to Fed data. The flood of cash into money-market mutual funds has subsided, but at $4.6 trillion the total is still nearly $1 trillion larger than before the pandemic, Investment Company Institute data show. Anthony Crescenzi, a portfolio manager at Pacific Investment Management Co., is among those saying that uncertainty about the economy will keep cash accounts bloated.
“The high savings rate exists in part due to the caution that households are taking with respect to expenditures, a factor that is likely to persist for some time,” said Crescenzi. “The presence of a substantial amount of savings deposits on bank balance sheets is likely to impart downward pressure on market interest rates.”
The effect won’t just be limited to money-market rates, according to Crescenzi. Since banks also hold significant investments in longer-dated assets such as Treasury notes and bonds and agency mortgage-backed securities, the deposit glut should create demand -- and hence low yields -- for those assets as well.
Commercial banks occupy an increasingly crucial niche for fixed-income purchases. The global surge in sovereign debt to finance stimulus programs is testing even the voracious appetite of the world’s central bankers, with about $1 trillion coming to market in the months ahead that still lacks buyers.
One key variable will be the personal savings rate in the U.S., which shot up to 32.2% in April -- the highest in Commerce Department records dating back to 1959 -- as the economic shutdown reduced or eliminated many outlets for spending. The rate slipped back to 23.2% in May, but many analysts and investors expect it to stay elevated above last year’s average of about 8%.
Danielle DiMartino Booth, author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America” and founder of the Quill Intelligence research firm, likens this year to the Great Depression, a slump which was followed by an era of austerity and increased savings. While that may provide a financial cushion and a sense of security for savers, it very well could be a headwind to the rebound in the world’s largest consumer economy as a higher baseline savings rate is created.
“A lot of people are going to re-examine how they view money,” said Booth. “You are going to have a marked shift upward permanently in the propensity and the desire to save, which is not something we are used to in an economy that is normally about 70% consumption.”
The long-lasting psychological scars of this crisis mean that the savings rate should likely stabilize at about 15%, or double its historic average, according to Peter Yi, director of short-duration fixed income and head of credit research at Northern Trust Asset Management.