Ask the expert: Why are bond yields rising, and will money market rates follow?
December 16, 2010
Q: Like a lot of people, I rolled my eyes when the Federal Reserve announced a new program to drive interest rates down. Aren't CDs and money market rates low enough already? Much to my delight though, it seems the program isn't working--bond yields seem to be skyrocketing. Why is that, and will it spill over into CDs, savings accounts, and money market accounts?
A: It's been one of the more curious developments of the year. No sooner did the Federal Reserve announce a program to buy bonds so yields would move lower, than bonds started falling in price and yields started rising. All of this after a sustained rally in bonds prices previously. Ben Bernanke, it seems, really knows how to break up a party, even when he doesn't intend to.
Why has the bond market reacted in the opposite way from what the Fed intended? Perhaps the most convoluted explanation comes from Jeremy Siegel in the Wall Street Journal. Siegel explains that bonds are doing the opposite of what the Fed intends because people have so much confidence in the Fed's program that they are already assuming it will work, and thus are raising bond yields in line with heightened growth and inflation expectations. Then again, Siegel has always been a bit of a cheerleader for bull market sentiment.
A more likely explanation is a two-part acknowledgement that a) speculation led bonds to be overpriced previously, and b) the Fed has not yet deployed the bulk of the $600 million that it intends to pour into the Treasury market.
As for whether this will affect money market rates, CD rates, or other deposit rates, we'll have to wait and see. It's certainly a good sign, but it is likely to take genuine economic strength, rather than just market optimism, to get bank rates moving upward.
Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to our "Ask the Expert" feature. Just go to our home page and look for the "Ask the Expert" box on the lower left.