Interest roller coaster: up again

Interest rates payable on passbook and certificates issued by banks and savings-and-loan associations have been doing an uncharacteristic roller-coaster act thus far in 1980. And expectations of depositors have escalated.

In early 1980, interest rates on Treasury bill certificates of deposit -- those CDs keyed to the weekly rate of six-month Treasury bills -- were in the 8- ,9-, and possibly 10-percent range. During one week in April, the rate on T-bill CDs reached 15.7 percent.

Such fat interest returns whetted depositor appetites for more. Where else would they get an interest yield from an insured, risk-free investment that exceeded the inflation rate before taxes!

When the T-bills bought early in 1980 began maturing earlier this fall, depositors found options limited. They could roll over the T-bill CDs and get 12 to 13 1/2 percent interest again. Or they could get more than 12 percent in 30-months CDs -- compounded daily to a higher effective rate. Even the money-market funds dropped, although rates lagged those of the Treasury bills for a while. Numerous letters continue to ask, "Where can I put matured T-bill CD cash and continue to get high interest?"

Now short-term interest rates have once more climbed close to their spring levels as the Federal Reserve System restricts the money supply. Commercial banks have raised their prime rate for their best loan customers to 17 percent. Commercial banks are offering six-month money-market certificates paying 14.28 percent. Inflation and the upward bias it introduces into interest rates remain , and any move back to the 5-to 8-percent range appears unlikely within the near future.

One alternative is to roll over the money from maturing T-bill CDS into income stocks (primarily utilities) or deep-discount bonds. Yields on long-term AAA corporate bonds dropped from round 13 percent to 10.3 percent in June and then bounced back to the 13-percent range again. Prices of income stocks moved generally in concert with bond prices as yields fell and then rose by late summer. Since then prices and yields have moved little. Thus, these stocks are now in a good buying range again for attractive yields in the 11-to 13 1/2 -percent range, plus a potential for long-term capital gain.Buying income stocks or deep-discount bonds "locks in" the high dividend yields coincident with high interest rates. But they are not insured, and their prices vary daily. Also, you pay a commission when buying and later selling either stocks or bonds.

No-load money-market funds (noted in previous "Moneywise" columns) offer a second alternative, with different characteristics. Yields are not insured, and they change daily. Dividend income is also computed and compounded daily. You can expect no appreciation, as share values remain constant, usually at $1 a share. Yields tend to be a little higher than Treasury bills or CDs, and funds are immediately available without penalty.

Despite reader appetite for high interest income from insured certificates or risk-free Treasury bills, no other viable, low-risk alternative exists. The interplay of market forces will likely keep rates on a roller coaster. In such an environment I strongly recommend keeping funds relatively liquid -- not longer than the six-month T-bill CDs, for example. Money-market funds and income stocks can be bought or sold any business day if an alternative looks better. This is a time for caution and for keeping your options open.

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