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Jittery market bad for CD rates

By Claes Bell, CFA · Bankrate.com
Monday, August 8, 2011
Posted: 4 pm ET

On a day when the Dow Jones Industrials are down more than 600 points, a lot of CD investors are probably letting out a sigh of relief they've got a chunk of money sitting on the sidelines. Unfortunately, the forces pushing stock markets deep into the red don't really bode well for future CD rates either.

While writing a story today on the consumer consequences of Standard & Poor's debt downgrade of the U.S. (shameless plug: It will appear on Bankrate.com tomorrow), I got to speak with a couple of finance experts about how the market unrest will affect deposit rates.

Two opposing views emerged. One was that banks would be driven to seek additional funding from depositors to ride out economic turbulence caused by the downgrade, and rates would rise to reflect banks' competition for consumer dollars. The other was that a rush of spooked global investors seeking a safe place to stash their funds would turn to the FDIC-protected banks of the U.S. and banks would end up with more deposits than they knew what to do with.

I found the second argument more convincing, mostly because I don't really view the DJIA plunge today as wholly a result of the debt downgrade, considering there was a global rush to invest in U.S. Treasuries today, which wouldn't be the case if there really was a concern over the U.S. government's safety and soundness.

Also, we're already beginning to see solid evidence of U.S. banks being glutted with international and domestic deposits, most recently with a report that Bank of New York Mellon is planning to start charging interest to hold deposits. You read that right: BNY Mellon is offering negative interest on deposits from some of its biggest clients.

In a world where negative interest rates are popping up at the margins, CD rates are likely to stay at or near record lows for the foreseeable future.

What do you think? Does the carnage on Wall Street bode well or ill for CD rates?

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1 Comment
Ron C.
August 09, 2011 at 3:51 pm

Sure, the banks don't need the money since they don't want to lend it to anybody. This is distortion at its worst. I hate to tell you, but when I was a young'un (and times were bad), the banks wouldn't have had the balls to try to pay anywhere near zero interest. I remember 2% for passbook deposits. The government ought to open some banks to compete instead of feeding money to the greedy banksters.