CD Interest Rates Stable as U.S. Treasuy Yields Soar
Since the beginning of May, average CD rates have remained pretty much where they are today. The best CD rates available from banks have also remained stable but during this time long term U.S. Treasury yields are soaring. Long term yields are moving higher due to stronger than expected economic data and fears that the Federal Reserve will stop purchasing long term Treasuries and mortgage-backed securities (quantitative easing).
The Federal Reserve has been making these purchases to force long term interest rates lower. The Fed's plan has been effective at reinvigorating the economy and jump-starting the housing market recovery. Now that the Fed has almost achieved their goals, there is fear the Fed will stop their purchases.
Quantitative Easing Ending Will Eventually Force CD Rates Higher
Just the hint of the end of quantitative easing by the Fed is scaring the markets into selling bonds. When bond prices move lower, bond yields move higher. Since the beginning of May, yields on 5 year bonds are up about 30 basis points but the highest CD rates on 5 year certificates of deposit remain just under 1.75 percent. CD rates will move higher in sometime in the near future.
Highest 5 year CD rates at Banks this Week
Future Direction of CD Rates
Both long term and short term CD rates will remain low for the rest of 2013 and into 2014. Bank CD rates will finally move higher when the Federal Reserve Open Market Committee (FOMC) finally starts to increase the fed funds rate, their key interest rate. The current rate has been at near zero percent since December 2008.
The FOMC will increase the rate when the nation's unemployment rate dips below 6.5 percent. The Committee has stated this in their statements and meeting minutes over the past year. The current unemployment rate is at 7.6 percent and the rate probably won't dip below 6.5 percent until June 2014.
When the fed funds rate moves higher banks will quickly follow suit by increasing CD rates, savings rates, and money market rates. I believe the increase in rates will be rather quick so stay invested in shorter term certificates of deposit until mid 2014. When interest rates do move higher you can quickly invest in higher yielding accounts.
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