A bond market rebellion brings hope for savings accounts, money market rates
November 17, 2010
A funny thing has happened to Treasury yields since the Federal Reserve announced its program to drive those yields lower: They've risen sharply.
The Fed's quantitative easing program is intended to stimulate the economy by buying U.S. Treasury securities. When bond prices go up, yields go down. With short-term interest rates already about as low as they can go, the Fed was seeking to push longer-term rates down as well.
Longer-term rates tend to be more closely tied to most loan rates. Those loan rates are the Fed's real target -- by making loans cheaper, the thinking goes, people and businesses will start borrowing and spending more, and this will get the economy moving.
The best laid plans...
Following the Fed's announcement, Treasury yields dipped briefly below 2.50 percent. They've since risen to 2.85 percent, higher than they've been since early August.
Why aren't things going as Ben Bernanke planned? There are a few possible explanations:
- The market may be anticipating the success of quantitative easing, which would ultimately stimulate higher interest rates.
- The market is getting nervous about inflation.
- Treasury yields had moved so low in advance of the Fed's announcement that the quantitative easing program turned out to be a bit of an anti-climax. In other words, the announcement was so highly anticipated that it could never live up to expectations.
Whatever the reason, Treasury yields so far are defying the Fed's intentions.
What this means for CDs, savings accounts, and money market rates
The daily trading of bonds doesn't generally make a dent on CDs, savings accounts, and money market rates, which are set by bank executives. The general trend of bond rates, however, does affect deposit rates in the long run.
When it looked as though bond yields were settling lower for the long term, there was no reason for bankers to consider moving deposit rates higher. On the other hand, if bond yields break out into higher territory, it could put upward pressure on deposit rates. At the very least, it would give conservative investors a more attractive alternative.