Ten-Year CDs Are the Latest Sign of a Yield Drought

Photograph by Robert Caplin for Bloomberg Businessweek

The other day, within seconds of escalating out of a north exit of New York’s Grand Central Station, I had one of those cosmically defining epiphanies: For all its recent bad press, JPMorgan Chase is one lucky-as-hell bank. Towering over the hubbub of 47th & Madison is the former world headquarters of Bear Stearns, the octagonal granite and glass tower capped by a 70-foot illuminated crown that Morgan inherited in its March 2008 takeunder of the collapsed investment bank.

By now you’ve hopefully repressed memory of how JPMorgan Chief Executive Jamie Dimon deftly negotiated with Washington to score a $30 billion backstop to rescue Bear—a first-round victory for the concept of private profits via socialized risks. Mere months later, Dimon again availed himself of public financial aid, when JP Morgan acquired Washington Mutual, the biggest bank to fail in U.S. history, only after the FDIC seized the enormous lender. JPMorgan has since become too-gargantuan-to-fail, a designation that makes it close to immortal.

By all means, begrudge them everything.

Still, I was short of cash, and there, on 47th, was a panoramic Chase branch full of ATMs that dock noncustomers $3 a pop—a risk-free return for the bank that cha-chings by the millisecond for Morgan and its $2.3 trillion in assets. As I walked in, I was immediately greeted by an ad for a 10-year CD that yields 2 percent. Mind you, never in my life have I encountered a 10-year CD, much less one that so brazenly promises to return less than the present rate of inflation over a decade. I walked up to the poster to see if my eyes had erred. A security guard gave me the look of death as I reached for (and put back) my phone camera.

Who would sign up for that long a commitment for so little in return? Well, yield desperation is all the rage these days. With the Federal Reserve at zero interest rates for nearly four years and further tamping down any and all bumps on the yield curve, savers have gotten killed for trying to do the right thing. In a show of reverse-Robin-Hoodism, their dollars have disproportionately subsidized banks wanting to repair their balance sheets and goose their dividends.

As scared cash floods the system, there’s been no shortage of news that government securities the world over are paying negative yields; on Friday it was the Dutch two-year note going negative for the first time. And so there’s more scavenging in the crowded corporate bond market, where yields now average a record-low 3.13 percent, according to Bank of America Merrill Lynch index data. Can you blame companies for jumping at the chance to issue 30-year debt at skimpy yields? Institutions are even selling 100-year bonds.

Time was, when rates were unattractive, bank employees—“tellers,” they called them—would point you to their mutual-fund desk or urge you to diversify rate risk by laddering across multiple account maturities. Now things have gotten so dreggy that depositors are increasingly willing to get locked in at a half-point over the 10-year Treasury note. The upshot: banks like JPMorgan can doggybag today’s cost of funds well into the future.

The irony of all this: Cheaper, longer-term deposits bolster the prospects for JPMorgan stock and its 3.33 percent dividend yield. In other words, the top 1 percent must be loving this 2 percent deal.

    Before it's here, it's on the Bloomberg Terminal.