CD Rate Trend Index

The earnings reporting cycle is nearly over and it was not as painful as many expected. Like the anticipated extraction of a tooth, the prospect of the impending displeasure is not always realized once the Novocain is administered. How does this apply to interest rates? With fear beginning to subside, the economy can start to rebuild and as it recovers the Federal Reserve and Treasury can begin removing the cheap money from the system, which will lead to higher interest rates.
N. Barry Vosler, CFP, CRPC, LPL Financial, DeWitt, Iowa

The Federal Reserve Open Market Committee gets a temporary break. With no meetings officially scheduled until late June, it is up to the markets to determine the direction of interest rates. The yield of 30-year U.S. Treasury Bonds is up nearly 60 percent since the December lows recently eclipsing the 4 percent level. The five-year and 10-year yields have also seen impressive gains since late December 2008 but still far below the yields of recent years. The Federal Reserve and the Treasury Department have been creating a new playbook in their efforts to slow the perilous decline in the economy. Trillions of dollars have been given, loaned and invested in an attempt to keep capitalism alive and well but bigger challenges may lie ahead of us. The economy appears to be stabilizing and will eventually gain strength. How the banking sector and Federal Reserve handle the budding recovery will be of vital importance. With so much money waiting to be lent out and the cost of borrowing at historically low levels, there is an enormous risk of destabilization in the form of high inflation and U.S. dollar devaluation. Both of these outcomes would mean higher interest rates, potentially close to those witnessed in the late 1970’s and early 1980’s when the prime rate soared to over 20 percent. Just as there was a possibility that the U.S. could have fallen into a depression without the quick response of the Federal Reserve and Treasury Department, the risk of sky high interest rates are a possibility if these two institutions fail to respond with such similar speed. Cash is close to trash as many money markets mutual funds have closed or stopped taking money in this difficult low interest rate environment. If the institutions can’t make money on short-term funds, how can we be expected to? For the foreseeable future, we would suggest that duration on non-adjustable rate CD’s and other fixed interest rate products be kept to a maximum of three years. You should also consider balancing your portfolio with inflation protected assets such as TIPS or a small percentage of your holdings in gold or commodity related items. There are a variety of ETF’s and mutual funds that can help meet these goals but as always, carefully review the risks and tax ramifications for each of these investments.
Edward W. Gjertsen II, CFP, vice president, Mack Investment Securities, Glenview, Ill.

Rightly or wrongly, the consensus is that the U.S. economy has either hit bottom or is pretty close to it. Coupling this feeling with the huge issuance of U.S. Treasuries that will be coming to market, will put pressure on rates on all fixed income instruments (including certificates of deposit) to rise. As long as rates don’t go too high too fast, this is a good thing since it would be because things are starting to improve.
Hebert G. Hopwood, CFP, CFA, president, Hopwood Financial Services Inc., Great Falls, Va.

CD yields will continue lower before they move higher and any signs of life will be confined to longer maturities.
Greg McBride, CFA, senior financial analyst, Bankrate.com

We certainly may continue to see some erosion in yields but it should be slight.
Laura Bruce, senior reporter, Bankrate.com