Will CD Rates Follow the Recent Climb in Treasury Rates?
January 09, 2010
| MoneyRates.com Senior Financial Analyst, CFA
Treasury yields climbed steadily in the first half of December 2009, reflecting market conditions that generally argue for higher interest rates. CD rates have proven to be a little stickier, holding firm while financial market rates rise. However, if the market-driven trend of rising yields continues, it will only be a matter of time before bank rates are obliged to follow.
This is a good time to keep a close eye on market and bank rate activity--how market rates respond to the changing economy, when bank rates start to move, and which banks lead the way when that happens.
CD Rates Unmoved So Far
In the first half of December, 10-year US Treasury bonds gained 35 basis points of yield, climbing from 3.20% to 3.55%. This is not surprising given that the economy seems to be at a turning point. The first signs of recovery from recession were seen in the third quarter of 2009, and now investors (and just about everyone else, for that matter) are watching to see if that recovery can be sustained.
Another factor that is consistent with the recent rise in Treasury rates is the return of inflation. These haven't been the kind of inflation numbers that scare the financial markets, but it has become clear in recent months that a moderate level of inflation is re-establishing itself. The deflationary period is over.
Strong economies tend to pull interest rates higher for a positive reason: they make capital more valuable. Inflation tends to push rates higher for a less positive reason--interest rates must rise to allow investors to earn any real return over the inflation rate. The combination of the two effects, as is the case now, can easily justify higher interest rates.
However, while publicly traded Treasuries have begun to respond to these macroeconomic factors, CD rates have not. Banks generally have the luxury of taking a bit of a wait-and-see approach when market rates rise, and CD rates will be especially sticky on the way up because they represent longer commitments. After all, the bond market saw a similar perk-up in rates around the end of October 2009, only to see them slide all the way back down again by the end of November.
Face it: if you were a banker, would you offer higher rates before you absolutely had to? The rise in Treasury rates over the first two weeks of December was an encouraging sign, but the trend will have to establish itself more firmly before bank rates respond.
Reaching the Tipping Point for CD Rates
What will it take, then, for CD rates to finally move? As always, the Treasury market is a good indicator to watch. If yields break out of their up-and-down pattern and sustain their recent rise, bank rates are likely to follow. Certainly, key underlying trends in the economy, including stronger employment, stability in the housing market, and the reemergence of inflation, will continue to influence whether market rates move definitively higher.
When they do happens, bank rates won't move all at once. Instead, it will be more like popcorn starting to pop. Banks will likely make their moves independently, one by one, and slowly at first. That's why keeping an eye on Money-Rates.com's list of highest-yielding banks, and not just the market as a whole, can help you be an early mover in getting the highest interest rates on CDs as well as other deposit vehicles.
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