It's not just your imagination; 2011 was an abysmal year for CD rates. A new study shows yields on deposit products dropped 21 basis points. Rates for mid-term CDs, or CDs with maturities between one and three years, were hit particularly hard. From Dan Geller at Market Rates Insight:
Mid-term CDs, from one to three years, registered the second largest drop of 28 basis points, from a national average of 0.87 to 0.59 by the end of the year. Smaller drops in rates registered for long-term CDs, three years and over -- 18 basis points; money market accounts -- down 15 basis points; and short-term CDs, up to one year -- down 13 basis points. The only deposit type that exhibited a mild increase in interest rates was savings, which increased 3 basis points during 2011.
"The continuation of rate decreases in 2011 stems from two factors," said Dan Geller, Ph.D., executive vice president at Market Rates Insight, "The first is soft demand for loans, which forced banks to lower lending rates to increase demand, thus pushing deposit rates further down to protect net interest margins. At the same time, consumers are reluctant to abandon the safety and security of federally insurance deposits, and are increasing their savings despite shrinking yields."
I think Geller's right that the convergence of those two factors -- a savings surplus and soft loan demand -- really hurt CD investors last year.
On the plus side, though, banks' Q4 results are beginning to show an uptick in loan demand that could bode well for CD rates in 2012. During last week's earnings calls, executives at Wells Fargo, SunTrust, Fifth Third and other banks cited improving loan growth, especially in commercial loans, credit cards, auto loans and mortgages, as a contributing factor to their profitable fourth quarter.
As Geller points out, soft demand for loans generally undermines CD rates, because deposits are largely used to fund loans, and if rates on loans are at record lows, you're likely to see CD rates follow suit. Should that trend reverse itself and interest rates start creeping up again on commercial and consumer loans thanks to healthy demand, it could give CD investors some reason to hope they'll be able to look back on 2011 as the year CD rates bottomed out and began moving back up.
What do you think? Will 2012 be a better year for CD investors?
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