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Have CD rates finally bottomed?

By Claes Bell · Bankrate.com
Friday, June 28, 2013
Posted: 9 am ET

Ever since the financial crisis, rates on certificates of deposit have been steadily declining to the point where you can barely buy dinner at Olive Garden with the interest you'd earn on a $10,000 one-year CD.

That decline is due in part to downward pressure on rates from the Federal Reserve. But with the Federal Reserve hinting it could soon "taper" its massive purchases of mortgage-backed securities and Treasuries, is it possible that CD rates will make a comeback?

In a word, yes, especially on longer maturities. Rates on Treasuries are spiking. The five-year Treasury constant maturity rate has risen from 1.03 percent at the beginning of the month to 1.38 percent today. Amazingly, the average five-year CD rate actually rose a little bit this month, too, with the average rate adding 1 basis point to 0.78 percent, the first time it had done so since the summer of 2011. A basis point is one-hundredth of 1 percentage point.

While 1 basis point isn't anything to write home about, it seems unlikely that Treasury yields can continue to rise without CDs rising more substantially at some point. That's because the movement of five-year CD yields and the five-year constant maturity rate are highly correlated -- my spreadsheet says it's 0.985 since Bankrate started collecting data in 1984 with one being perfect.

The picture on shorter maturities is less clear. The one-year constant maturity rate is up only a couple of basis points, rising from 0.14 percent at the beginning of the month to 0.16 percent, perhaps because the markets believe Fed tightening is still a little ways off.

Of course, with Fed officials "clarifying" Chairman Ben Bernanke's remarks this week in an attempt to soothe global markets, the spike in long-term rates could subside somewhat. But it seems likely that we'll see CD rates resume their previous pattern of steadily burrowing toward zero percent.

Where do you think CD rates are headed?

Follow me on Twitter: @ClaesBell

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