stark contrast to the record-low returns of the past several
years, certificate of deposit yields are on the rise and savers
are rejoicing. Over much of the past year, week in and week
out, CD yields have been on an upward track. Thanks to Alan
Greenspan and the Federal Open Market Committee's intention
of raising interest rates further, there promise to be many
more such weeks to come.
The improvement in CD yields has been slow, but it has been
consistent. Over time, this has produced some nice effects
for CD investors as yields on CDs with maturities of one year
and less have more than doubled since March 2004. The average
one-year CD yield that was 1.1 percent last March is now 2.39
percent. The same is true of the six-month CD, which stood
at 0.93 percent last March and now stands at 2.0 percent.
Investors can tack an additional percentage point of yield
onto their returns, while maintaining FDIC insurance protection,
by investing in the highest-yielding
CDs available nationwide.
Sparking the improvement in CD yields are the six interest rate
hikes enacted by the Federal Reserve since June 2004, just as
the 13 rate cuts between 2001-2003 pushed yields into the cellar.
And the good news is expected to continue as more Fed rate hikes
are expected as 2005 unfolds.
However, the improvement has not been so evident on longer-maturity
CDs. Yields on intermediate and long-term Treasury securities,
those with maturities of three years and longer, have not behaved
in the same way as yields on short-term instruments that are
strongly influenced by Fed action. The same phenomenon that
recently brought mortgage rates down to 11-month lows has produced
lackluster improvement in the longest maturity CDs.
Look at the average five-year CD yield as an example. On
June 30, 2004, the average yield was 3.6 percent, having climbed
from 2.89 percent in March. But the average yield is just
3.62 percent now, with improvement having ground to a halt
even as the Fed has continually raised interest rates. Why?
The five-year Treasury yield that was 3.81 percent on June
30 when the Fed raised interest rates for the first time fell
to 3.71 percent by mid-February.
The two-year and three-year CD yields have fared slightly
better. The average two-year CD yield increased from 1.62
percent in March 2004 to 2.3 percent by the first rate hike
on June 30, continuing to climb to 2.83 percent now. The average
three-year CD yield also increased sharply between March and
June 2004, from 2.12 percent to 2.82 percent. But from June
until November, the average yield was essentially flat, inching
to 2.84 percent on Nov. 3. In the three months since, yields
have increased to 3.13 percent, spurred by yields on three-year
Treasuries that increased from 2.85 percent to 3.76 percent
in the same time frame.
A complete rebound in long-term CD yields is dependent upon
intermediate and long-term Treasury yields rising from what
appear to be unreasonably low levels. During Alan Greenspan's
Senate testimony Feb. 16, he referred to this as a "conundrum,"
implying that even the Fed Chairman is mystified as to why.
The rate of economic expansion and repeated Fed rate hikes
that are expected to continue through much of 2005 point to
higher rates across the entire spectrum -- not
just on the shortest maturities.