Last week, Americans dumped about $36 billion into money market funds to take advantage of yields that have shot past 5 percent, a rate of return not seen for more than a decade.

Money market funds typically invest in safe, short-term securities, such as treasury notes and in some high-grade, short-term corporate bonds.

Deposits into money market funds have soared 25 percent to $1.5 trillion this year, rising as returns dangled by venues other than banks have risen in train with the U.S. Federal Reserve’s rate hikes.

To keep deposits from slipping away, many banks have begun raising their interest rates on deposits, with some now exceeding 4 percent for certain accounts.

“I can earn 5 percent doing nothing versus risking losing a bunch in the market,” one saver told The Wall Street Journal.

The savings windfall and higher returns could help the U.S. avoid a recession, the WSJ noted.

TREND FORECAST: In this case, what’s good for savers is not necessarily good for banks.

To try to hold onto deposits, banks have begun raising the interest rates they pay on many accounts but this is an expense they can scarcely afford.

Small and regional banks are holding most U.S. commercial real estate loans, a portfolio losing value by the day; some major property owners have already defaulted with more to come. See:

● “SPOTLIGHT: REAL ESTATE’S TAILSPIN” (24 Jan 2023)

● “COMMERCIAL REAL ESTATE VALUES FALL” (30 May 2023)

● “CORPORATIONS FIND IT HARDER TO BORROW” (6 Jun 2023)

● “YELLEN AGREES WITH CELENTE: MORE BANKS WILL MERGE” (27 Jun 2023)

● “ECONOMIC UPDATE — MARKET OVERVIEW” (11 Jul 2023)

● “BRACE FOR A WAVE OF BANK MERGERS, EXPERTS SAY” (18 Jul 2023)

● “ECONOMIC UPDATE – MARKET OVERVIEW” (25 Jul 2023)

● “SPOTLIGHT, TOP TREND 2023: OFFICE BUILDING BUST” (25 Jul 2023) 

At the same time, banks are holding at least $400 million of unbooked losses in low-yield bonds they bought during the COVID War and which now they are unable to sell because newer bonds offer higher returns.

To offset an expected increase in bad loans, banks have had to set aside a larger amount of cash at a time when they have been forced to pay more interest and hold investments of little value.

We maintain our forecast that more small and regional banks will fail. Their remains will be eaten by larger banks, further consolidating the industry into fewer and fewer lenders. If history is a guide, that concentration will increase consumers’ costs. (Please see ECONOMIC UPDATE in this issue for additional trends analysis and trend forecasts.