CD Rate Trends This Week: Jan. 5


In an interview with The New York Times  (Stock Quote: NYT) that appeared in the December 25, 2009 edition of the paper, William H. Gross, co-chief investment officer of the Pacific Investment management Company (more commonly known as Pimco), let the cat out of the bag for bank interest rate investors.

Not only is Wall Street not on your side, but your government isn’t, either. “What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said Gross. “It’s capitalism, I guess, but it’s not to be applauded.”

What’s worse, Gross is going against the grain of many economists by predicting that bank rates won’t be heading north anytime soon – and maybe well into April, 2011.

“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”

What Gross is saying isn’t actually alarming, if you’ve been following the strange Kabuki dance between Washington and Wall Street. What it boils down to is this: the Federal Reserve basically spent 2009 offering free money to banks. With interest rates to banks at 0%-to-1.25%, financial institutions gorged themselves on free government cash.

That set up a chain of events that led banks to ignore interest rate investors and reward them with, among other things, higher certificate of deposit rates. Why should banks play ball with customers? They’re getting all the money they need from Uncle Sam, so the incentive to raise capital by offering higher CD rates just didn’t – and still doesn’t – exist.

That’s why three-month CD rates were down about 35% for the year, and six-month CD’s were of by over 60%. One-year rates slid by about 80%; and two-year CD’s dropped by roughly the same amount. Five-year CD’s didn’t fare much better, sliding 60% for 2009.

The landscape doesn’t look like it will change much in January, 2010. For the week entering the new year, CD rates remained flat, as measured by the BankingMyWay Weekly CD Rate Tracker.

For the week, three-month CD’s held steady at 0.39%, while six-month CDs remained at 0.59%. One-year bank issues inched down from 0.89% to 0.88%, while two-year CDs stayed level at 1.34%.

Four-year issues also held steady at 1.87% while five-year CD’s remained fixed at 2.18%.

Yes, eventually interest rates will have to rise, sooner or later. Federal Reserve Chairman Ben Bernanke said as much at a speech in Atlanta last week. But it could be a glacial process, since key benchmarks like the unemployment rate remain low, and indicators from Washington say a second stimulus, along with a brand new loan modification program, may be on the way. That news sends a signal to banks and to consumers that the recession isn’t over yet, despite what we’ve been told by our political leaders.

In the meantime, for the best possible CD rates in a bare-bones market, turn to BankingMyWay’s CD Rate Search. Just tap in your zip code and begin sifting through the best CD deals in your area.

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