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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Comparing Treasury Yields with CD Rates - Will CDs Lag as Rates Rise?

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Comparing Treasury Yields with CD Rates - Will CDs Lag as Rates Rise?

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.

DepositAccounts.com DepositAccounts.com Treasury and CD Yield Comparison

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.

The 5-year Treasury yields are based on Treasury Department’s data and Ally Bank 5-year CD yields are based on my weekly summaries over the last six years.


  Tags: CD rates

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Comments
25 Comments.
Comment #1 by Shorebreak posted on
Shorebreak
Great chart Ken. I hope you will update and post it for us every six months or so.

18
Comment #2 by CapitalClimate (anonymous) posted on
CapitalClimate
Depending on the rate spread, the after-tax yield on Treasuries may sometimes be higher than CDs in many states, since they are not subject to state income tax. 

8
Comment #3 by Anonymous posted on
Anonymous
We not gonna see any big impact of rising interest rates on the CDs, reason, FDIC, the rates are manipulated and given a guidance to all banks to follow the FDIC approved rate brackets.

There is no longer market economy, everything is staged, from interest rates to money supply to unemployment, to GDP, to you name it.

22
Comment #20 by Anonymous posted on
Anonymous
#3 got it right, FDIC decides the rates not FOMC.

1
Comment #4 by OldGuy posted on
OldGuy
Good post--and something well worth watching closely.  My own view is that, if 10-year Treasury rates remain about where they are, you'll see some individual banks do temporary promotions at relatively attractive rates, but you won't see a widespread impact right away.  First Republic's CD rate boost this week is an example. 

As for Treasuries, I had an order to buy on TreasuryDirect in today's 7-year auction, but just cancelled it when yields starting to sag well below 2%.  I'll probably put the money in a First Republic CD. 

 We'll probably see Wall Street's tantrum about "high" rates continue for a while.

16
Comment #5 by Anonymous posted on
Anonymous
SHOREBREAK gets a shout out!!!!  Well done!!  No reason to even consider interest rates anymore. They will never go up again. Find something better. The real risk is putting your money in these disgustingly low rates. You are getting nothing......that's the true risk, folks!

6
Comment #6 by CapitalClimate (anonymous) posted on
CapitalClimate
Auction results:

Description:                  7-Year Note
Term:                         7-Year
Series:                       M-2020
Interest Rate:                1-7/8%
High Yield:                   1.932%

Yuck.

7
Comment #7 by OldGuy posted on
OldGuy
Capital Climate:

I couldn't agree more with your "Yuck"  But to Ken's point, a 1.932% yield-to-maturity compares favorably, all other things being equal (which they're not, of course) with Discover Bank's 7-year 1.90% APY.  PenFed and other cus will be posting new rates on Monday, so we should be watching.

8
Comment #8 by Anonymous posted on
Anonymous
What about short term treasuries?

3
Comment #9 by Anonymous posted on
Anonymous
Thanks OLDGUY for the heads up on First Republic -- turns out its local and just what I was looking for as one of my CD's just came due today!!  Thanks again!

3
Comment #10 by OldGuy posted on
OldGuy
#9: I can't take credit for the First Republic rates.  Ken reported it on the blog on Tuesday.  What I will say is that, based on what I've seen in the past and what the branch folks tell me, First Republic usually changes its rates on Monday nights.  But they reserve the right to change them any time, and very well may if other banks don't follow suit. 

7
Comment #11 by Anonymous posted on
Anonymous
Correction: 1.90% is Discover's 10-year rate.  It's 7-year rate is 1.80%.  They've lowered these so often it's hard to keep track.

4
Comment #12 by scottj posted on
scottj
Real estate is really booming in my area so plan is to keep my matured CDs liquid and hope to see some banks offering some decent promo rates soon. Luckily I do still have some time left on 3% CDs and at least  have my 1.17% money market to hold the liquid funds

5
Comment #13 by lou posted on
lou
Scott, where are you getting the 1.17% money market rate?

2
Comment #15 by lou posted on
lou
Thanks, Scott.

I have a 5.25% Wachovia CD (Wells Fargo) coming due in 2 weeks and will have some decisions to make. One will be whether to keep the money liquid and wait for better deals than we are seeing today. At this point not sure what I am going to do.

2
Comment #16 by scottj posted on
scottj
My gut is telling me to wait a bit, think the longer term reward is worth  losing some in the short term. 

4
Comment #17 by lou posted on
lou
You may be right, but in the short term it looks like interest rates are coming down. Under this Administration you got to figure they are going to do everything possible to keep interest rates low. Interestingly, this recent increase in rates demonstrates that the Fed may not control long term rates, despite all these QE programs. I am going to see how it plays out for the next few weeks and then make a decision.

4
Comment #18 by Anonymous posted on
Anonymous
Iou, I feel your pain.  My 5.25% Wachovia CD (Wells Fargo) matured yesterday.  Almost brought tears to my eyes.  Cashed it in and is now sitting in my MM account in another bank earning a whopping .25% interest.  Definitely not going to tie it up long term for peanuts. 

2
Comment #19 by lou posted on
lou
#18, we should have bought the 7 year 5.25% Capital One CD which was available at the same time the Wachovia one was being offered to the public. I try not to second guess it since in those days it never occurred to me go out more than 5 years. What are you thinking you're going to do with the money?

3
Comment #21 by scottj posted on
scottj
Think I will take some of my liquid and put in USAlliance 24 month 2%. Waiting to long could **** up the ladder I have been working on. Still have CDs coming due end of July and 2 large ones in September. Also nice that I have a branch about 20 minutes from me

3
Comment #22 by lou posted on
lou
2% for 2 years is a good rate relative to what's out there. Thought I would never have anything good to say about a 2% CD, but I have learned over the years to never say never. I am still not sure I can accept a rate this low. Hopefully, rates will approach a more normal level in two years.

3
Comment #23 by Anonymous posted on
Anonymous
Right now I am seeing 10 year treasury rates up a little bit, but with loan rates on autos around 1.5% to 1.75% I have a hard time believing that CD rates will be on the rise.

3
Comment #24 by Anonymous posted on
Anonymous
I'm not clear on where all these "new deposits" that the banks "are flush with" are coming from.

Can someone explain? Thank you.

4
Comment #25 by KenKounter (anonymous) posted on
KenKounter
I AM A SHOPPER AND THE LOW RISE OF THE CPI IS COUNTERINTUITIVE TO ME. I DID A LITTLE STUDYING AND CALLED BLS. I THINK THAT THERE MAY BE DISTORTION IN THEIR METHODOLOGY. FOR INSTANCE, THEY HAVE THIS LARGE BASKET OF GOODS THAT THEIR SURVEY THAT LOOKS AT THE INDIVDUAL PRICES OF ITEMS. HOWEVER, MANY STORES AND MANUFACTURERS ARE MAKING SUBTLE CHANGES IN THEIR PRICING THAT MAY ELUDE THE BLS COMPUTATIONS. FOR INSTANCE IF THEIR IS A BULK PURCHASE DISCOUNT (E.G. $10 OFF A $75 PURCHASE) THAT IS DECREASED OR DISCONTINUED IT DOESN'T SHOWUP IN THE CPI BECAUSE IT IS NOT APPLIED TO INDIVIDUAL ITEMS. THE SAME IF A STORE (CVS) DISCONTUNIES A GREEN PROGRAM FOR REUSEABLE BAGS. ALTHOUGH AT A MACRO LEVEL THE CPI METHODOLOGY SEEMS TO MAKES SENSE THEIR MAY BE SOME DISTORTIONS IN THE WAY THAT THE RAW DATA IS INPUTTED. I DON'T KNOW THAT ANYONE EVER CHECKS THE BLS WORK DOWN  TO THE WEEDS. KEEP IN MY MIND THAT WE ARE TALKING ABOUT TENTHS OF A PERCENT ($10 ON EVERY $10,000 SPENT). 

2