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Kiplinger's Personal Finance Magazine

Interest Rates Lurch Downward

Interest Rates Lurch Downward – Brief Article

Joan Goldwasser

Just as we were getting used to the bungee-cord motion of the stock market, the bond market fell into a similar dive-and-rally pattern–dragging interest rates along for the ride. In just a few weeks’ time, the 30-year Treasury bond snapped from 5.2% to 4.7% and back to 5%. But the general direction is down. What’s a seeker of safe havens to do?

Well, look on the bright side. With inflation at about 1.5%, real interest rates are at their highest levels since 1989. For instance, the average money-market fund pays 4.9%, providing an after-inflation return of 3.4%. Compare that with real returns two years ago, when inflation stood at 3.3%. You earned 5% in the average money-market fund, but the purchasing power of a dollar left in such a fund all year rose by only 1.7%.

Still glum? Then reach for better-than-average returns among the top-performing money funds and short-term certificates of deposit on page 58, such as the Strong Investors money fund at 5.6% or the top six-month CD from TeleBank at 5.5%. That’s a not-too-shabby 4% after inflation. Locking up your money in a five-year CD increases your yield by only 0.6 percentage point.

Some funds are rolling out incentives to add a little spark to low yields, such as the brand-new Warburg Pincus money-market fund (800-927-2874), which awards one Northwest WorldPerks frequent-flier mile for every $4 you invest (minimum investment, $5,000). But with a seven-day taxable yield of 4.9% in its first weeks, the fund still does not beat the top performers.

Borrowers, meanwhile, have plenty to smile about. At about 6.5%, 30-year, fixed-rate mortgages have dropped to lows not seen since the 1960s (see “Home,” on page 70).

A drop in the prime rate to 8% also delivers a bit of a break to credit card holders and borrowers with home-equity credit lines, who can expect to see prime-based interest rates adjust downward within a month or two.

New home-equity credit lines can be found at a fully indexed rate of prime plus no percentage points. Because the interest is deductible, the effective rate is about 5.75% for a taxpayer in the 28% tax bracket.

Even average new-car loan rates–stuck at 9% or higher for the past year–dipped to 8.6% in mid October. To find the best rates, check with banks as well as automobile dealers. NationsBank’s CarFinance.com, for instance, offers a 48-month $18,000 car loan at 7.2%.

RELATED ARTICLE: Best Deals in Credit Cards

Low-interest premium cards Best if you carry a balance

CASH-ADVANCE

ISSUER RATE INDEX/MARGIN RATE/FEE(C)

Pulaski Bank & Trust (G) 7.99% discount rate(*) 7.99%/none

+ 2.99

Huntington National (P) 8 prime 8.5/2%

Huntington National (G) 9 prime + 1 9.5/2

Capital One (P) 9.9 — 19.8/2.5

First USA (P) 9.99 — 19.99/2

ANNUAL TELEPHONE

ISSUER FEE NUMBER

Pulaski Bank & Trust (G) $50 800-980-2265

Huntington National (P) 75 800-480-2265

Huntington National (G) 49 800-480-2265

Capital One (P) none 800-822-3397

First USA (P) none 800-294-2993

No-fee premium cards Best if you usually pay the balance each month

INTRO INTRO RATE

ISSUER RATE FULL RATE LASTS

AFBA Industrial (G) 8.5% prime + 3.15 six months

Huntington National (P) 5.9 prime + 4.9 six months

Capital One (P) — 9.9 —

First USA (P) — 9.99 —

Pullman Bank & Trust (G) — 11.25 —

CASH-ADVANCE GRACE TELEPHONE

ISSUER RATE/FEE(C) PERIOD NUMBER

AFBA Industrial (G) 11.4%/2% 25 days 800-776-2265

Huntington National (P) 12.9/2 25 days 800-480-2265

Capital One (P) 19.8/2.5 25 days 800-822-3397

First USA (P) 19.99/2 25 days 800-294-2993

Pullman Bank & Trust (G) 11.25/2 25 days 800-785-5626

(C) Cash advances frequently have no grace period; additional fees may be changed. (G) gold card (P) platinum card

(*) 4.75% as of Oct. 16 Source for loan rates and credit cards: Bank Rate Monitor, N. Palm Beach, Fla.

COPYRIGHT 1998 The Kiplinger Washington Editors, Inc.

COPYRIGHT 2000 Gale Group