CD Rate Trends This Week: March 2


A few thoughts on the current interest rate picture, and why it’s just about inevitable, despite the lurches and false starts from the U.S. economy, that long-term interest rates are set to rise.

First, with a national deficit that will crest $1.6 trillion by the end of 2010, the U.S. government desperately needs to attract buyers of U.S. Treasuries. Typically, the government can only raise money in two ways — by raising taxes and borrowing money. The former is politically untenable — at least right now — but the latter is in play.

The fly in the ointment is that Treasuries aren’t in big demand by investors. There’s a cloud hanging over the U.S. Treasury market, as some investors are increasingly worried that the U.S. will follow Greece into bankruptcy, unable to pay its debts and make good on its bond obligations. This is probably a long shot, as most economists say that the U.S. economy is in much better shape than Greece’s markets, and that investors have little worry about the U.S. honoring its debts.

But the fact that the subject is even on the lips of (mostly foreign) investors is worrisome.

Second, investors aren’t exactly thrilled about the current rate of return they’re getting on their investments in Uncle Sam. The Federal Reserve’s decade-long policy of keeping interest rates low has fueled low rates of return from Treasury yields — the average yield dropped from 6.58% in 2000 to 3.85% so far this year, according to the Treasury.

Thus, the return on investment for 10-year Treasuries has fallen by over 270 basis points over a 10-year period — and the 3.85% yield we’re seeing now is a vast improvement on the 2.46% interest on 10-Year Notes we saw in January 2009. Investors are increasingly looking at Treasury investments and deciding they can do better elsewhere, and that’s a scenario the U.S. government can’t afford.

So it’s no coincidence that the Federal Reserve is actively looking to sell the $2.29 trillion in securities it currently has on its balance sheet. That threat alone, combined with aggressively-priced U.S. Treasury auctions, should force long-term interest rates higher, as consumers would have to pay more for mortgages and businesses would have to pay more to borrow money.

As rates go higher, more investors will jump into the U.S. Treasury pool, thus making White House economists happy, if not the American public, which isn't too pleased about current government spending.

What’s less certain is what happens on the shorter end of the bank rate spectrum. While there are no guarantees, the Federal Reserve seems like it will break from historical norms and leave short-term rates alone, even as it takes measures to boost yields on longer-term U.S. debt securities. That could result in a situation where long-term rates rise, while short-term rates pretty much stay where they are — a condition that economists and bond traders refer to as a widening yield curve.

What does it all mean? With interest rates headed up on the long-end, and down on the short-end, look for more investors to abandon low-risk, low-reward bank certificates of deposit and money market investments in favor of long-term bonds — a scenario that seems scripted and orchestrated by the Federal Reserve, as a survival mechanism for the U.S, economy.

So once again, CD investors take it on the chin, as interest rates remain low across the board. That’s the deal again this week, as measured by the BankingMyWay Weekly CD Rate Tracker:

Description           This Week     Last Week

60-Month CD            2.140%        2.133%

48-Month CD            1.836%        1.838%

24-Month CD            1.274%        1.282%

12-Month CD            0.833%        0.848%

Six-Month CD            0.551%        0.565%

Three-Month CD        0.358%        0.368%

What will it take for CD rates to rise? Further interest rate acceleration would pop rates up again, but there seems little sentiment among economists that the Fed — busy selling assets to prop up the U.S debt picture — will raise rates this month. But as the year goes on, and if the economy improves, things should be different.

That doesn’t mean there aren’t some good CD rate deals out there. To find the best ones, visit the BankingMyWay CD Rate Search Tracker.

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