Why Higher CD Rates Could Be Bad News


There’s a larger theme developing right now that looms large over the bank deposit sector, one that could boost interest rates on certificates of deposit rates over the long term – but at the expense of the overall economy. It’s the alarming growth of the U.S. federal debt.

The numbers are rolling in now from September and it’s becoming only too apparent that, this year at least, Halloween is coming one month too late. According to the U.S. Treasury Department, our national debt nipped at the $12 trillion level last month, while the U.S. Congressional Budget Office pegged the 2009 budget gap (on the downside) to be about $1.4 trillion. With 2009 estimated U.S. revenues clocking in at about $2 trillion (roughly $900 billion of that from individual income taxes), that means 40 cents on the dollar is earmarked for the interest alone on the U.S. debt.

In other words, only 60% of taxpayer revenues are being used to pay off the actual debt incurred by Uncle Sam – the rest is used to pay off the interest on the debt. Wait, it gets worse. With federal deficits headed toward $9 trillion by 2019, our national debt will exceed $20 trillion, the OMB estimates. The cherry on this sadistic sundae is the fact that global investors are starting to shy away from U.S. debt, and that U.S. tax revenues are falling significantly.

Taken together, it’s a recipe for national economic disaster. As the federal debt rises, so too will inflation, and with that an accompanying rise in interest rates to tamp inflation back down.  But the downside is this: even if you earn higher interest rates on bank CD’s, thanks to rising Treasury yields, you’ll need even more money to pay for everyday items, where prices will rise thanks to rampant inflation.

It’s a scenario that very few people are talking about, but one that bank investors should acknowledge – especially in an political environment where the Federal Reserve Chairman and the President of the United States say the recession is over, and that the worst is behind us.

But if there’s one, neon-bright message from the numbers listed above, it’s “Not. So. Fast.”

Right now, CD rates remained mired in historic lows. One-year CD’s, as measured by the BankingMyWay National CD Rate tracker, are down to 1.04% - pretty much where bank CD investors saw similar CD issues in 1983.

Two-year CD rates also down this week, from 1.52% to 1.50%, while four-year CD’s slid back from 2.02 to 2.01%. Five-year CD issues fell a rung, from 2.31% to 2.29%.

Herein lies the reason for the wake-up call at the top of this article. While Washington politicians – and way too many economists who should know better – are telling investors that we’ve hit bottom and that bank rates are bound to rise, they’re not giving you some key underlying reasons why.

Yes, it’s a downer, and a recession-weary public doesn’t want to hear it – and who can blame them? But if you think this economic landscape has “hit bottom” just stick around a while. Thanks to our booming national debt, you ain’t seen nothing yet.

Remember, while you shop for the best rates, give BankingMyWay a shot. You’ll get a fair shake, along with a shortcut to some of the best CD rates out on the marketplace.

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