Time to Start “Going Long” on Certificates of Deposit?

The meetings of the Federal Reserve didn’t used to be worthy of watching, but nowadays, the Fed is activist and consistently makes news.

The biggest news to come out of today’s Fed meeting may have flown under the radar a bit in all the hullabaloo about Bernanke seeing yet more “green shoots” in the form of an improving or at least stabilizing economy.

This big news that seems to have gone relatively unnoticed? The Fed isn’t going to keep throwing money at long-term Treasury bonds.

During the first half of the year, that is exactly what the Fed did, propping up the market for long-term Treasury bonds in an effort to keep mortgage rates low, so that everybody who could conceivably refinance their mortgage, would refinance their mortgage now. With foreclose filings exceeding 300,000 per month, that made sense.

But all those Fed greeenbacks flooding the Treasury bond market did another thing, too: the over-supply of money kept CD rates at artificially low levels. The best CD rates on a six month CD are currently in the 2.5 percent range, but the average rate for a six month CD is a full percentage point less than that, at 1.49 percent.

Now, though, the Fed is selling longer-term Treasury bonds. A $37 billion auction of five-year bonds brought a nice group of buyers, causing a slight uptick in five-year CD rates, whereas shorter-term CD rates actually fell.

Is it time to start “going long” on CD rates?

Not necessarily. But it is definitely time to start thinking about it.