A Week of Wild Moves in the Treasury Market

Interest rates were one of the top subjects of discussion in the investment community for the week.  Two weeks earlier, May 11 through May 15, long term Treasuries began to rise as a flood of Treasuries via new auctions were beginning to hit the market.  The week that ended May 22 saw the mid term, two year to five year, Treasuries begin to rise.  That trend continued through the week ending May 29, with the three year Treasury reaching 1.52%, the five year Treasury at 2.46% and the ten year Treasury reaching 3.71% during the week.  Those Treasury rates were the highest closing interest rates seen all year. 

Then Friday hits and the rates abruptly reversed direction.  The week ended with the two year at 0.92%, the five year at 2.34% and the ten year at 3.47%.  An interesting twist to the end of the week was that the one year Treasury ended at 0.47%, lower than the start of May when it averaged 0.53%.  The two year saw a similar move with two year Treasury ending at 0.92% after starting the month at 0.97%.  Now, the five year and ten year bucked that trend and ended the month 26 basis points higher on the five year and 24 basis points higher on the ten year. 

The interest rate picture for the year is even more profound.  The low rate for the year on the one year Treasury was 0.40% reached on the first week of January yet ended this week at only 0.47%.  The low rate for the six month Treasury was 0.28% also reached in January and ended the week just one basis point higher at 0.29%.  The ten year Treasuries year long odyssey is an entirely different picture.  The ten year Treasury started the year averaging 2.48% and ended this week at 3.47%, a rise of almost one percent.  The result is a lot of movement that ended with a steeper yield curve due to the long rates advancement and the short rates remaining unchanged.

Now, the bank CD rate curve is beginning to resemble the slope or direction of the Treasury yield curve with the outcome being a much wider spread between short term CD rates and long term CD rates.  While the curves are looking similar with low short term rates and higher long term rates, the manner in which these two rate curves reached this point was very different.  The average for the best certificate of deposit rates started the year with an approximate distribution between the six month CD rates and the five year CD rates of 1.05% and that spread has now widened to 1.56%.  The difference between the movements in the two curves is that the CD rate curve steeper slope was the result of dropping six month CD rates

Six month CD rates have been on a rather deep downward trend since the start of the year.  In January the six month CD averaged 2.62% and now it sits at just 2.05%, a whopping 57 basis point drop in rates.  Five year CD rates were in the 3.60’s in the start of 2009 at a time when the ten year Treasury was hovering around 2.50%.  Currently, the five year CD rate is at roughly the same position, 3.61%, while the ten year Treasury has risen to 3.47%.  Yield curves that end up similar but achieve that result through different paths. 

The key is that I am not smart enough to have a clue what it is means other than the banks and the banking industry loves a rising yield curve and the changing curve is a general indication of normality in credit market supply and demand balance.

Tags: bank CD, Banks, CD rates, certificate of deposit, credit market, five year CD rates, interest rates, rates, six month CD rates, treasury rates, yield curve

This entry was posted on Tuesday, June 2nd, 2009 at 4:25 pm and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.