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Top CD Rates Remain Stable as Government Reopens and 1 Month Bond Rates Plummet
 

Top CD Rates Remain Stable as Government Reopens and 1 Month Bond Rates Plummet

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The debt default has been averted and after 16 days, the government has reopened for business. What economic damage has been done remains to be seen but initial analysis from Standard & Poor's says the economy took a $24 billion hit and growth in the 4th quarter will be 0.6 percent lower as a result of the shutdown.

In the days leading up to the shutdown, short term bond yields skyrocketed while short term CD rates remained the same. On September 19, 1 month U.S. Treasury yields that averaged 0.00 percent had increased to 0.32 percent on October 15, two days before the government would have defaulted on the 17th.

1 Month Bond Rates and CD Rates


The best CD rates in our 1 month certificate of deposit rate database before the shutdown were at 0.15 percent. The best rates today are also at 0.15 percent. Once a deal was announced, one month Treasury yields fell to 0.14 percent and yesterday fell back down to the pre-crisis level of 0.01 percent.

For the past several years, both short term and long term CD rates were higher than the equivalent term bond rates. This is once again the case since 1 month bond rates have returned to the same level as they were last month.

Round 2 of Budget Negotiations in Early 2014


The current crisis has been averted but we may find ourselves back in the same mess early next year if some Tea Party folks have their way. The deal reached between Republicans and Democrats was a short term deal. They agreed to fund the government until January 15 and put off hitting the debt ceiling until February 7.

What will play out in early 2014 remains to be seen but it will be interesting. The Senate Minority leader, Mitch McConnell, defended the deal and slammed the tactics used by Senator Cruz and the Tea Party House Republicans. I do hope another crisis is averted and no further damage is done to this still-fragile economy.

Best CD Rates This Month


You already know the best 1 month rates are at 01.5 percent. Right now the best 3 month CD rates in our database are at 0.45 percent.

The best 6 month rates in our database are the best deal overall when you consider the rate and term. The best 6 month CD rate right now is at 1.00 percent! That is much higher than rates on most 12 month certificates of deposit. The bank offering that rate and yield right now is Zions Direct. The highest CD rates on 1 year certificates of deposit are at 1.10 percent, slightly higher than the top 6 month rate.

When Will CD Rates Move Higher?


There is light at the end of the tunnel as long as the politicians don't ruin things. CD rates and all bank deposit rates are dependent upon the federal funds rate and when the fed funds rate is increased, deposit rates will also increase.  While we don't know exactly when, thanks to the Federal Open Market Committee (FOMC), we can give a guesstimate. The FOMC says they plan to keep the fed funds rate at its current level, zero percent to ¼ percent until the nation's unemployment rate falls below 6.5 percent.

The August unemployment rate was at 7.3 percent, only 0.8 percent higher. The rate is expected to remain at 7.3 percent in the September report. We should have gotten the September report on October 4 but courtesy of the politicians closing the government won't get the numbers until October 22.

Before the shutdown, we estimated the rate would fall to 6.5 percent sometime in the spring of 2014, now that might have been put off by a few months. Our original forecast for when bank CD rates would increase was early summer 2014 but now it might not happen until late summer or early fall 2014.  Many variables play into this and the shutdown and its aftereffects are yet to be fully realized.

Expect CD Rates to Move Sharply Higher When Rates Finally do Move Higher


When CD interest rates finally do move higher in 2014 it will have been almost 6 years that we have suffered with the lowest rates available in our lifetime.

When rates move higher, the increases will be rather quick and it won't take rip-roaring growth or high inflation to send rates higher. The fed funds rate at zero percent is so accommodating for growth. Just to get to a neutral rate where the fed isn't spurring growth will mean several 0.50 percent increases in the rate. This will probably happen before the end of 2014, so we could quite possibly see 12 month CD rates somewhere between 2 percent and 3 percent in just over a year.

That being said, one recommendation I can make right now is to not lock into a CD account of more than 1 year. If you lock in a low rate on a 2 year to 5 year CD account, you will miss out on higher rates. The alternative is having to cash in early and incur an early withdrawal penalty.
Author: Brian McKay
October 20th, 2013