Does the surge in CD bonds mean better rates on the horizon?

December 08, 2010

| MoneyRates.com Senior Financial Analyst, CFA

A surge in bond yields has put 10-year Treasury rates back over 3 percent for the first time since July. Is this yet another false signal, or a sign of things to come for interest rates?

Rates on CDs, savings accounts, and money market accounts have been down near zero all year, and will require not just a short-term surge in market interest rates, but a sustained rise before they start following the trend. That's why the recent move in bond yields--and the reasons behind that move--could have implications for CD, savings, and money market rates.

When bonds become difficult to predict

The magnitude of the move in bond yields certainly looks encouraging. After bottoming out below 2.4 percent in early October, bond rates have been making their way higher, though in a zig-zag manner. The latest surge not only cracked the 3 percent mark, but took 10-year Treasury yields to nearly 3.2 percent.

The timing of this rise in bond yields is curious. It has defied the announcement of the Federal Reserve's latest quantitative easing program -- a program to drive interest rates down by purchasing Treasury bonds.

The very latest leg up in the rise of bond yields has come in the wake of last Friday's extremely disappointing employment report. Normally, Treasury bond prices rally on bad economic news, meaning that yields fall. So far, the opposite has happened.

The economic mosaic

The seemingly contrary nature of the bond market's move is a reminder that you can never isolate any one factor in trying to understand economic conditions. The economic picture is more like a mosaic, consisting of a great many pieces. The general pattern and tone of those pieces will determine how the picture takes shape.

Plus, when it comes to financial markets, understanding the economy is not enough. Valuation is also a factor. It has seemed that interest rates were unnaturally low, meaning that bonds were overvalued. Under those circumstances, a correction, in the form of falling bond prices and rising yields, may have been inevitable, regardless of short-term economic events.

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