June 8, 2009 Update

Over the last couple of weeks, the yields on Treasury Bonds have started to rise, depsite the Fed's stated intent to keep them low. The Fed embarked on a program to purchase up to $300 billion in Treasuries to drive down yield in order to help stabilize and lift the housing market.

This matches the Fed's intent with short term rates, as they have set the benchmark Fed Funds rate to 0% and don't seem to be in any rush to raise it.

Still, markets have a mind of their own. Treasury bond rates have crept up in response to inflation fears, the impression the economy is improving, and the growing Federal budget deficits. Markets are pricing in a greater than 50% change that the Fed will have to raise the Fed Funds rate by this fall.

So how is this impacting the world of savings and cd accounts? Like their bond counterpars, the story is mostly one of divergence between short terms and longer term rates. Money market, savings, and short term CD rates still continue to drop. With the BestCashCow High Yield Average not hovering at 2% APY for savings and money markets, it's hard to envision it going much lower. The same is true for short-term CDs.

Thirty-six month CD rates dropped by 3 basis points, the first drop in the last five weeks. It's disappointing and hopefully an aberration. The average rate on 5 year CDs bottomed out in March and is continuing to rise. The average 5-year CD rate according to the BestCashCow rate tables reached its low during the week of March 27 at 3.43% APY. Today, it stands at 3.56% APY. Why the increase? Because hearing about looming hyper-inflation, investors need more of a return to lock their money up for extended periods of time. And if the inflation doomsayers are really correct, then even 3.56% APY will be a losing position. Look for rates on longer-term deposit accounts to continue to rise as long as the fear of inflation exists and as long as the Fed is printing money.   

The spread between the average savings and money market rate on BestCashCow and the average 3-year CD rate on BestCashCow has stabilized. Both savings accounts and 3-year CD rates have remained relatively flat over the last couple of weeks as we have reached a bottom. The deposit yield curve seems to have taken a breather as banks and depositors try to devine where the rate winds are blowing.  There's a good chance it will continue to steepen if long-term deposit rates continue to react to inflation fears. 

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