Rate cut pinches yields on savings

Interest rates on savings are heading south.

Concerns about the credit markets have prompted money-market mutual-fund managers to abandon riskier holdings in favor of safer — and therefore lower yielding — investments. Last week's one-half percentage point interest-rate cut by the Federal Reserve also reduced yields. They may fall more in coming weeks if the Fed cuts rates further, as some analysts expect.

"Money-market yields fall with the Fed because the assets they buy are pegged in many ways to the Fed funds rate," says Peter Crane, president of money-fund tracker Crane Data.

Money-market funds are focusing on even shorter-term securities than usual to reduce risk. Many have shied away from mortgage-backed securities in recent months, as credit quality has weakened. "They're keeping it short, buying higher-quality names, generally playing it very tentative and cautious," says Ruth Shaw, fund-ratings analyst at Standard & Poor's.

With yields falling, investors may be tempted to look for the highest rates, but it's better to focus on steady offerings. "Competitive yield should be icing on the cake, nothing more," Shaw says.

However, savings accounts and certificates of deposit may eventually sport higher yields, at least temporarily, says Greg McBride, senior analyst at Bankrate. "Banks set rates only by how much they're willing to pay to attract funds, not by what the Fed does," he says. "Banks are more aggressive on rates, and much slower to cut rates, because they're so dependent on consumer deposits." The yield on a one-year CD averages 3.76 percent, according to Bankrate, but some CDs and bank savings accounts have yields topping 5 percent, McBride says.