To function as a funding tool, bank CDs have to compete with comparable investments for investor dollars. Because CDs are guaranteed by the Federal Deposit Insurance Corp. for up to $250,000, they have a safety advantage over even the most highly rated private bonds. One of the few investments with similarly airtight investor protection is U.S. Treasury bonds, so banks keep a close eye on Treasury rates, says Leggett.
"When you look at a retail CD, these are risk-free investment products," Leggett says. "They're going to be priced based on a comparable, risk-free product, and that would be U.S. Treasuries."
|July 20, 2011||0.252|
|Source: Treasury Department|
How it's crushing CD rates: The financial crisis of 2008 and 2009 saw a huge flight to safety into U.S. Treasuries. That caused Treasury yields to plummet.
This low yield makes them pretty poor competitors -- and frees banks to lower their CD yields.
What needs to change: Banks track what kind of yields their peers are offering on their CDs, but competition for deposits among banks has been relatively weak.
For banks to face competition for investor dollars, the global economy needs to recover to the point where panicked investors aren't funneling large sums of money into risk-free investments such as Treasuries, McBride says.