cds

CD rates linked to Treasury yields

Don TaylorQuestionDear Dr. Don,
I have a question about interest rates on bank deposits such as CDs and savings accounts: Does U.S. government debt have any effect at all on the interest rates that banks offer on deposits?

For example, if the yield on the 10-year Treasury note suddenly goes up as the world begins to sour on U.S. debt, would that have a positive or negative effect on interest rates offered at banks for CDs? Or are these totally unrelated phenomena?
-- Robert Rates

AnswerDear Robert,
What goes on in the market for U.S. Treasury securities does impact the interest rates offered on bank products, like CDs and savings accounts.

Higher 10-year note yields would put upward pressure on CD rates -- although, since most CDs have final maturities of five years or less, keeping your finger on the pulse of the five-year note would be just as important.

You can follow the yields on Treasury securities on Bankrate's Rate Watch page.

The Federal Reserve's Open Market Committee sets a target for the federal funds rate, which is the interest rate at which banks loan one another reserves. The current target of zero percent to 0.25 percent doesn't leave much room for a lower target.

The targeted federal funds rate influences other short-term interest rates, like Treasury bills and other money market instruments. The federal funds rate's impact on longer-term interest rates is less certain, based largely on how good a job bond investors feel the government is doing in managing inflation through monetary and fiscal policy.

With little room to maneuver in the targeted federal funds rate, the Fed is expected to launch a second round of quantitative easing, known in the industry as "QE2," on the heels of the Nov. 3 meeting. The Fed will buy Treasury securities with cash, and by doing so inject more liquidity into the economy with the idea of stimulating growth.

They're not unrelated phenomena. Keeping interest rates low to stimulate the economy has also kept rates low for savers. Seniors trying to live off the income on fixed-income investments have had the hardest time with these low rates.

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