With the renewed concerns of banks and the latest CPI rate reported at 3.4%, it's hard to find anyone ecstatic about the yields that banks are paying on deposits. Before the financial crisis, yields of 5% were the norm on short term deposits. However, since the crisis, scared money looking for safety has pushed up prices on fixed income assets, helped also by the Fed's rate cuts aimed to ease the credit crunch that has made history.
The Board of Governors' latest reports show that 6-month Certificate of Deposit rates on CDs in the secondary market have headed up and remain closer to the 1% level. CD rates in the secondary market are very interesting to track because unlike the regular CD rates offerings inside the banks, CDs that trade in the secondary market are determined by investors who are buying and selling the instruments. If investors have CDs that they would like to exit from, they can offer them up on the secondary market and allow another investor to buy the CD.
The price where the trade takes place then sets the yield for the new investor. The rate on these 6-month CDs has remained below 1% since 2009. A rise in yield above 1% may indicate concerns in banking institutions more so than inflation concerns. A shifting of capital toward more sound banks from shakier institutions may be the cause of the changing rates since investors still value safety over yield. As well as concerns over financial soundness, investors might also be less willing to accept such low yields for the perceived risk of lost opportunities elsewhere.
30 year mortgages on the other hand remain very low as the Federal Reserve does as much as possible to make borrowing money for homes very attractive. The rate on a 30 year mortgage is more dependent on the 10 year Treasury rate which is still at a historically low 1.97%. Because housing is key to the economy, mortgage rates are critically important to help ease the pain of the still recovering housing market and related industries. For this reason, we can expect that mortgage rates will not be the first rates to move higher if and when investors begin to demand higher yields on their savings.
Of all of the interest rates reported by the Fed, few of them show anything but rates near lows. Treasury bond prices are up as seen by longer dated Treasury Bonds (TLT) and (IEF); therefore, rates are low as they should be. However, the underperformance of the Financial Sector (XLF), the bankruptcy of MF Global, and the European debt woes coincide with the slight rise in secondary CD rates.
Going forward, if investors begin to demand higher yields on their capital, we will most likely see the increasing rates in the products that trade based on investor demand and less on policy by the Fed and bank product offerings.