Bank Rate Commentary

The year ended with Treasury bond rates rising rather significantly.  Unfortunately, the rise in Treasury rates did not lead to a rise in bank certificate of deposit rates. 

Ten year Treasury rates started 2009 at extraordinarily low yields, as investors and banks poured money into the Treasury market as a safe harbor.  The closing high for the ten year Treasury in January of 2009 was 2.87% ( the close of January is better barometer of average rates since January rates were unusually low due to market uncertainty ) and it closed out 2009 with a yield of 3.85%.  The low point was reached in January when the yield hit 2.23% and the high rate was 3.98% in June.

The five year Treasury showed a similar increase, reaching a high of 1.87% in January and closing 2009 with an interest rate of 2.69%.  The lowest rate reached was in January when the yield dropped to 1.36% and the highest rate was 2.93% in June.

The current Treasury rates are therefore not at their highs but within 25 basis points or 25/100 of a percent of the yearly peak rate for both terms.

The one year Treasury was actually quite stable compared to the longer term Treasury maturities throughout the year.  The highest rate on the one year Treasury in January was 0.51%.  At the end of 2009, the one year Treasury had a rate of 0.47%.  The highest rate reached was 0.75% with the low at 0.26%.

With the low dollar and banks still reluctant to lend significant sums of new money, the conclusion on the direction of interest rates is clear…….as soon as someone can definitively tell us what that direction is, we will print it.  The consensus among the Wall St. pundits has been for higher interest rates in the near future, that call was started in mid 2009 and yet those rates have clearly not materialized and who even knows what the nesr future means. 

Higher rates are certainly in the forecast.  The question is one of timing, when will the higher rates arrive.  The economy is no longer disintegrating, but looks far from expanding beyond what the government dole has provided.  Private sector job growth is absent thus far and though it is expected be positive for December there appears to be no sectors that are definitively seeking more employees.

The Fed Chairman, Ben Bernanke, seems to be hinting that rates will have to rise in due time.  But there is little evidence in the Fed minutes indicating an interest rate increase is scheduled for the near future.  The previous Fed Chairman has built a questionable legacy but had one great virtue, once the double speak and picturesque language of Mr. Greenspan was stripped away what he said was mostly accurate and could be used to steer future investment decisions.  When the Fed implied rates would be low, they stayed low.  When the Fed hinted that tightening was in the cards, tightening came and interest rates rose. 

Assuming, the current Fed Open Market Committee does not fib, the last published statement from the Dec 15-16 Fed meeting clearly indicates that interest rates will stay low for sometime,  “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Tags: bank, certificate of deposit rates, interest rates, rates, treasury rates

This entry was posted on Wednesday, January 6th, 2010 at 3:41 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.