Far too often consumers are so concerned with what their interest rates are that they never take a step back and look at the bigger picture.  While low interest rates for debt are great and high interest rates for savings are fantastic, the interest rate should not become the be-all, end-all reason driving people to put their money in certain places. 
 

The interest rate you earn on an interest-bearing account should not be the only reason your money is parked there.  In other words, look beyond the interest rate.
 

What about fees? It doesn’t matter if your credit card has a 0% APR if you are paying a fee every month just for the privilege of carrying the card around in your wallet.  Your mortgage loan’s interest rate might be lower than everyone else on your block, but your neighbors may not have a costly prepayment penalty or Private Mortgage Insurance with every payment.  Some fees are inevitable when dealing with debt, but some lenders will offer low interest rates to get your attention and then hit you with a barrage of fees.
 

Fees apply to savings too.  Why in the world should you pay a fee every statement cycle for your savings account? Your money should be earning interest without having the balance slowly whittled away by fees.  There are simply too many financial institutions offering feeless interest-bearing accounts with impressive interest rates for you to keep your money in an account that is getting constantly bombarded by fees, regardless of the interest rate they give you.
 

What about your needs? You might have a credit card with a low interest rate, but would you be better served by a rewards card with a slightly higher interest rate that allows you to accumulate cash, travel benefits, or more? If you are the type of person who regularly utilizes a credit card, yet always pays the balance off each month, then a rewards card can result in some really attractive bonuses.  You can apply this same logic to an equity loan.  Yes, you will probably pay a higher interest rate for a fixed equity loan, but isn’t that better than having an initially lower adjustable interest rate that has the potential to shoot sky-high when interest rates rise?
 

Savings accounts should be about more than interest rates.  Examine the reason why your money is in savings.  For example, if you’re building up an emergency fund you won’t want this money to sit in an account with a high interest rate which also happens to be quite risky.  Losing your entire emergency fund due to a downward swing of the market is bad news.   
 

A low interest rate for credit and a high interest rate for savings can be a great starting point to grab your attention, but a savvy consumer will know that there are other aspects to take into consideration. 

Earlier this morning Ambac Financial Group Inc., the world’s second largest bond insurer, posted a $1.66 billion loss for the first quarter as well as operating losses that were over three times worse than what many analysts expected.  This will have a negative impact on the over $500 billion worth of bonds that Ambac insures.

Credit default swap spreads surged for the embattled bond insurer as traders increased bets that Ambac won’t be able to meet it’s bond guarantees.  It also casts serious doubts as to whether the worst of the credit crisis has finally passed, which many financial experts were claiming.

While Ambac survived it’s last threat of a ratings downgrade of it’s financial strength by raising $1 billion in cash in a sale of stock, it will grow increasingly difficult for the company to raise additional capital.  Ambac is currently seeking shareholder approval to nearly double it’s shares of outstanding stock to 650 million shares up from 350 million.

A ratings downgrade would have serious repercussions in the entire bond market.  Certain institutional investors like government pension funds are required by law to hold only AAA rated securities and would be forced to sell any Ambac insured bonds at a loss.

The flood of these bonds on the market would further drive up yields as prices fell.  Financial institutions that continue to hold these bonds would also have to revalue their portfolios and realize these investment losses on their books.

It will also increase calls for a government bailout of the bond insurance industry, like the Fed did with Bear Stearns.  However, this would do little to alleviate the underlying problems in the financial sector and would only serve to shift the risk of loss from investors to taxpayers.

In times of economic distress, investors flock to safety.  The bond market usually acts as a safe harbor for many investors but the precarious financial position of many bond insurers has many shying away from corporate and municipal debt.

Since last summer, demand for treasury securities as well as the Fed’s rate cutting campaign, has steadily driven down yields.  Demand for 1 month T-bills has been especially brisk, with a number of money market funds reluctant to invest in short term commercial paper.

Back in March, in the wake of the near collapse of Bear Sterns, the yields on 1 month T-Bills fell to 0.27%, it’s lowest in over half a century.  Yields recovered slightly in the beginning of this month but are once again below 1 percent.

With many institutional investors feeling that the stock market hasn’t hit it’s bottom yet, the short maturing T-Bill gives them a safe haven to tide their money away until they feel the time is right to jump back into stocks while sacrificing very little liquidity.  The Treasury Department has also decreased the minimum face value of it’s securities to $100, down from $1,000 as of April 7, which makes it viable purchase for a larger number of investors.

Keep in mind that this is all taking place while inflation is on the rise and that the “real” yield is actually negative.  What we have now is an upward sloping yield curve, which is a favorable situation for banks.  Banks are able to borrow short at lower rates and lend long at higher rates.  Depending on how inflation plays out, long term interest rates may even rise further in the near future.