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Debt ceiling a boon for CD rates?

By Claes Bell ·
Tuesday, January 15, 2013
Posted: 5 pm ET

If Congress allows the fight over raising the debt ceiling to escalate into a full-blown crisis, there's little doubt it will cause big problems for the global economy.

Not only would government spending dry up almost instantly, taking vast sums of money out of the U.S. economy, but global confidence in the creditworthiness of the U.S. could be shaken, resulting in some ugly consequences. From the Council on Foreign Relations:

Most economists, including those in the White House and from former administrations, agree that the impact of an outright government default would be severe. Federal Reserve Chairman Ben Bernanke has said a U.S. default could be a "recovery-ending event" that would likely spark another financial crisis. Short of default, officials warn that legislative delays in raising the debt ceiling could also inflict significant harm on the economy.

Many analysts say congressional gridlock over the debt limit will likely sow significant uncertainty in the bond markets and place upward pressure on interest rates. Rate increases would not only hike future borrowing costs of the federal government, but would also raise capital costs for struggling U.S. businesses and cash-strapped homebuyers. In addition, rising rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education and health care.

Of course, the U.S. has never defaulted on its debts, so it's hard to know what would happen for sure. But while most of the consequences look to be very negative, there would be a silver lining for at least one beleaguered group: savers.

CD rates tend to follow Treasury yields

CD rates tend to follow Treasury yields

Rates on certificates of deposit track closely with yields on U.S. Treasuries. CDs generally command a modest premium over Treasuries because CD investors are being paid to lock up their money until maturity, but when yields on one-year or five-year Treasuries go up, CD rates tend to follow. So if Treasury yields rise because global investors start to doubt the creditworthiness of the U.S. government, CD rates may see a real bump.

That would be a big help to savers, who've been stuck with historically low CD rates for years now with no end in sight. While it probably wouldn't offset the massive cuts to government programs that would likely follow an all-out debt ceiling crisis, in an economy crashing under the weight of complete legislative dysfunction, you have to take the good news where you can find it, I guess.

What do you think? Will CD yields go up if we hit the debt ceiling?

Follow me on Twitter: @ClaesBell

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January 18, 2013 at 5:03 pm

I'm sorry, but we're currently under the debt amount right now that we're susposed to hit later this spring. So why isn't the clamity happening right now? Wouldn't the best way to avoid the debt ceiling is simply implenting a spending freeze on today's level? Deal or not, the government will still be bringing in hundreds of billions monthly in tax revenue to cover servcing the debt, not to mention the +16 trillion of revolving credit their already using

Claes Bell
January 16, 2013 at 10:00 am

Definitely a good point. But if things do get bad enough, we could see capital flight, couldn't we see some capital flight, which would put upward pressure on deposit rates?

January 16, 2013 at 8:26 am

I doubt this would cause an increase in CD yields. In fact, it may have the opposite effect as the damage to the economy would dry up what little loan demand there currently is and make individual investors even more risk averse. The bottom line to financial institutions would be even more deposits coming in the door and little loan demand to speak of. Not a catalyst for higher CD yields by any stretch of the imagination.

January 15, 2013 at 10:23 pm

As long as this phoney is in the White House, this country will never see the light of day let alone a higher interest rate. The rest of the planet is running FAST away from socialism/communism and this presidential dope is full speed ahead toward it!!