The recent sharp climb of Treasury yields has sparked hope for savers waiting for the end of this awful interest rate environment. I’m hesitant to say that we’re at a turning point now. We have seen several cycles of rising and falling Treasury yields over the last four years. The economy may be improving, but as described in this CNBC article, we are still in a “low growth, low inflation environment”. That could cause the Fed to delay when it starts to taper its bond buying, and that may cause Treasury yields to fall back down.
If the economy does improve sufficiently to allow the Fed to start tapering, the rising yields may hold. The question for savers is when will the higher Treasury yields carry over to CD rates. This TheStreet article makes the case that savers won’t see higher CD rates anytime soon. Some factors mentioned in the article that will keep CD rates low include:
- ”banks flush with new deposits”
- ”"Too big to fail" impacts CD rates because the large, systematically important banks gaining deposits have little incentive to raise rates.”
- ”It's important for investors to remember that a heavy number of participants actively trade Treasuries each day on the open market, while individual banks decide where to set CD rates.”
- ”With the Fed giving the most cash to banks these institutions simply have less of a need to attract new depositors with more competitive CD rates.”
So if this trend of rising Treasury yields does hold, it may be awhile before it translates to higher CD rates. DA member Shorebreak asked the question if we may see a period in which Treasury yields are higher than CD yields. That had me thinking back to a time when Treasury yields were higher than many CD rates. One of those times was before the 2008 financial crisis. It was a time when many considered Treasury notes and bills as better deals than CDs. MyMoneyBlog wrote this blog post showing how one could compare T-Bills with savings accounts. In the future, that comparison may again become interesting.
When the financial crisis hit, Treasury yields fell much quicker than CD rates. We may see a similar lag as yields increase. I thought it would be interesting to look at how Treasury yields and CD rates have changed over the last six years. So I decided to generate the following graph. It shows the 5-year Treasury yields and the 5-year Ally Bank CD yields starting from January 2007 and ending this week. Yields are compared every 6 months on or near January 1st and July 1st.
I decided to use Ally Bank CD rate instead of the average CD rate since the average CD rate is typically much lower than what savers can get from internet banks. For savers, I felt Ally Bank is more representative. Its CD rates have rarely been the best, but they have a long history of staying competitive. Note, Ally Bank was GMAC Bank before 2008.
As you can see in the graph, Ally Bank’s 5-year CD yields have always been higher than 5-year Treasury yields in the period shown. However, the yields were fairly close before 2008. The Treasury yields fell much more in 2008 and 2009. Ally Bank’s 5-year CD yield has fallen in a much more steady fashion. With the recent sharp rise of Treasury yields, the 5-year Treasury yield is currently very close to Ally Bank’s 5-year CD yield. If Treasury yields do continue to rise, we may finally see a period where 5-year Treasury yields will be higher than Ally Bank’s 5-year CD and other top 5-year CD rates.