Long Term CD Rates Moved Higher Due to Higher Long Term Bond Rates
As kids head back to school and we head into fall, short term CD rates have barely changed while the best CD rates on long term certificates of deposit move higher. Long term rates are moving higher because long term bond rates are moving higher. In fact, long term bond rates have been surging higher all summer.
10 year bond yields moved higher the past several months on fears the Federal Reserve will wind down the current round of quantitative easing (QE3). Rates have moved much higher even though the Fed hasn't actually announced any changes to their buying $40 billion a month in mortgage-backed securities (MBS) and $45 billion a month in long term bonds.
10 Year Bond Yields Double While 5 Year CD Rates Increase Only 0.50%
Rates on 10 year bonds moved from around 1.60 percent four months ago to this morning's rate of 2.89 percent. While long term 10 year bond rates have almost doubled, the highest CD rates on 5 year certificates of deposit are up about .50 percent. Since bank CD rates usually trail bond rates, we will continue to see CD rates move higher in the coming months.
Long term CD rates will catch up with the increase in long bond rates but if the FOMC does slow their purchases, rates will move even higher. Any announcement of winding down QE3 by the FOMC, which meets next week, will send 10 year bond rates into the 3.25 percent to 3.50 percent range.
Higher CD Rates on Long Term CD Accounts at the End of 2013
Long term CD rates which have already moved higher will continue moving higher if the FOMC starts winding down QE3. This will add additional pressure to banks to increase long term CD rates in order to compete with long term bond yields.
A 10 year bond rate of 3.50 percent will probably mean some banks may move 5 year CD rates as high as 2.50 to 2.75 percent. Right now the highest CD rates on 5 year CD accounts are around 2.00 percent.
We probably won't see 5 year rates increase to those levels until the end of 2013 because of the lag time between bond rates and CD rates. Seeing 5 year rates nearing 3 percent will be nice since we have all suffered with the lowest rates for years now.
Last Time 5 Year CD Rates Averaged Above 2.00 Percent Was Back in 2009
The FDIC's national average 5 year CD rate this week is at 0.74 percent with a rate cap of 1.49 percent. The last time you could find the majority of banks offering 5 year rates above 2.00 percent was over 4 years ago. The FDIC's average 5 year CD rate at 2.23 percent with the rate cap at 2.98 percent was back in May 2009.
Stay Liquid in Short Term CDs, Savings Accounts, and Money Market Accounts
Long term rates are increasing right now but I still wouldn't lock in a long term CD rate. In just a few years, 5 year rates will be back around 4 percent to 5 percent so why lock in 2.00 percent right now? A better bet is to stay liquid in a savings account or money market account.
You can also invest in short term certificates of deposit to earn a slight higher rate over a savings account or money market account. The best CD rates on 1 year certificates of deposit are just north of 1.00 percent while the best savings rates and money market rates are at 1.00 percent or slightly below.
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Sallie Mae Bank CD Rates: 2.00% APY 12-Month CD, 2.20% APY 15-Month CD, 2.40% APY 18-Month CD (Nationwide)