Banks have always sought after and used deposits to fund their loans.  Since the credit crisis peaked, there has been a sizeable increase in the competition for consumer deposits. The increased competition for consumer deposit accounts is the result of abnormal credit market forces and a number of large banks have needed to rely more heavily on these deposits to fund their loans.  The end result is banks have been forced to pay higher rates for CDs and money market accounts.  The increased deposit costs forces an increased rate on which the banks must loan the funds.  Therefore, until the bank industry need for funds from depositors abates, a cycle of elevated CD rates and lending rates should remain.

Most secure and safe interest rate returns have not improved in the past several weeks.  Of course, a general improvement in interest rates depends on what side of the trade you are on.  Interest rate improvements for the borrowers would surely be lower borrowing rates but improved rates for the investor are increased yields or interest rates. 

In our present environment, lending rates have been fairly sticky.  There are some lower rates in mortgages but higher rates on auto loans and credit cards.  The investment end of rates is somewhat similar.  Treasuries are considered the safest place to park cash, but their yields are the slimmest.  Treasury rates are still hovering at their low points, CD rates are slightly lower but long term corporate bond rates are higher.  Some investors are taking their cash and seeking to maximum yields while steering clear of equities and commodities.

In this setting, it is probably not a wise choice to try to earn a few basis points more by buying long term questionable debt instrumnets.  The U.S. economy is in a recession and the credit problems will continue to seriously weaken the economy and many of those businesses that are dependent on economic growth.  Corporate bonds are still an investment dealing with a state of change.  Banks continue to pay very good rates on CDs and money market accounts, these bank account investments eliminate this risk of safety and a questionable future.

And while some short-term funding markets have improved with the Fed bailout and lower Fed Funds rate, credit is still tight in most areas of the financial system.  This includes banking along with most all industries.  Banks are still having capital issues and they can’t go to the commercial paper markets to raise money.  The banks need to find another source of funds to continue funding operations.  One way they can raise some money is through the CD market.  Since the Feds injection to the banks, the dire need for capital by issuing high CD rates and money market accounts has been somewhat alleviated.  The days of rising certificate of deposit interest rates may very well slow, but until the Feds actions completely thaws the credit freeze the rate cycle will continue with higher than normal CD rates, money market rates and lending rates.

No user commented in " Cost of Deposits, CD Rates, Money Market Rates and Lending Rates "

Follow-up comment rss or Leave a Trackback

Leave A Reply

 Username (*required)

 Email Address (*private)

 Website (*optional)