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Higher LIBOR, better CD rates?

By Claes Bell, CFA · Bankrate.com
Monday, January 9, 2012
Posted: 3 pm ET

A credit freeze in Europe may mean higher CD rates for U.S. savers, according to a new report by Dan Geller of Market Rates Insight.

Geller argues that borrowing costs in the European Union could rise significantly, pushing the London Interbank Offered Rate, the primary benchmark for short-term lending rates in Europe, higher. That, in turn, could mean higher CD rates for the U.S. From the report:

Current indications are that the LIBOR is trending up as a result of the economic and financial status of the EU. The average LIBOR rate, which consists of the average of the 1, 3, 6 and 12 months rates, rose to 0.60 percent this November compared to 0.43 percent in April of this year - an increase of 40 percent in seven months. Historically, LIBOR rates and U.S. deposit rates have been highly correlated, which is the result of the inner dependability of the global financial world.

While a European credit freeze would be bad news for the global economy and could impede the U.S. economic recovery, rising deposit rates for savers would at least be a small silver lining.

Of course, Geller also notes the possibility that the European Central Bank will open up the money spigot the way the Federal Reserve did in the U.S., in order to get member economies back on track. That would actually lead to much lower rates for deposits as banks and businesses get bombarded with ECB cash, and no longer need depositors' cash as much.

My feeling is it's unlikely we'll get as robust a response from the ECB as we did from the Fed. The German economy has yet to show signs of a significant downturn, and Germany has major influence on the direction of ECB policy. With European credit conditions continuing to deteriorate, we may see European businesses turn to American banks to borrow. That should provide more demand for U.S. bank deposits and put modest upward pressure on CD rates. Of course, at this point, that may not be enough to make a big difference to yield-starved CD investors.

What do you think? Is a European credit freeze good for U.S. CD investors?

Follow me on Twitter: @ClaesBell

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1 Comment
must
February 19, 2012 at 3:04 am

Aw, this was a rlleay great post. In theory I'd like to write like this also taking time and real effort to make a good article but what can I say I procrastinate alot and never seem to get something done.