Low CD Rates, Bank Lending and Falling Treasury Rates

There are two primary forces constraining bank CD rates and savings rates, the low generally level of interest rates for comparable fixed income investments most notably Treasury rates and the lack of demand for depositor funds by banks as bank lending has continued at very low rate.

Bank deposit accounts such as certificates of deposit savings accounts and money market accounts supply banks with the funds needed to make loans.  Banks need depositors to make lending a profitable activity, in good economic times banks will pay higher interest rates on CDs and money market accounts and other deposits to attract the capital needed to make new loans. 

Unfortunately, the banks are not generating new loans at anywhere close to a break neck pace.  Without the funds going out the door in the form of bank loans, the banks have no need to aggressively attract new funds and hence CD rates fall. 

The FDIC’s rapid action to close struggling financial institutions also pushed the weak banks that were often paying the highest rates off the market, limiting the competition healthy bank have to pay to attract depositor funds. 

Rising Treasury rates are clearly a non event as well.  Without a rise in Treasuries, an increase in bank CD interest rates is unlikely. 

Treasury rates rose modestly in the final quarter of 2009 giving hope that savings yield may rise as well.  Rates increased as the market seemed to believe or at least hold hope for a sustained economic recovery.  If yields would have continued to break out of previous run of low rates and sustain their recent rise, bank savings rates and certificate of deposit rates were likely to follow suit.  Unfortunately as the doors opened for the New Year, Treasury rates back peddled giving up any gain in yield that may have been present at the end of the year. 

At the start of the year, the six month Treasury rate was at 0.18%, the one year Treasury rate was 0.45%, the five year stood at 2.65% and the ten year Treasury rate was 3.85%.  Eleven trading days later, the six month bill is down to 0.14%, the one year Treasury rate shed 12 basis points or 12/100 of a percent to 0.33%, the five year Treasury moved down to 2.48% and the ten year Treasury shed 12 basis points to yield 3.73%.  These are significant reductions in a very short period of time.

Bank CD rates declined through most of 2009, trimming yields on all maturities right through the end of the year and have now continued that trend in the first month of 2010.

Tags: bank, bank CD, CD interest rates, CD rates, certificate of deposit rates, interest rates, money market, rates, savings rates, ten year Treasury rate, treasury rates

This entry was posted on Wednesday, January 20th, 2010 at 5:12 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.