To find out why -- and get some hints as to when rates may show significant improvement – one need only look to how CD rates are set.
CD rates can be tied to a range of indices or rates. They can be linked to the stock market, commodities or even currencies, but the majority of CDs pay a rate of interest based on more familiar standards such as the prime rate and Treasury security yields, according to Investinginbonds.com, an educational website run by the Securities Industry and Financial Markets Association, or SIFMA.
The federal funds rate impacts both the prime rate and Treasury yields. The federal funds rate is set by the Federal Open Market Committee, and it's the rate at which banks lend each other money overnight. Right now, the federal funds rate is targeted at 0 to 0.25 percent.
When the Fed increases these short-term interest rates, banks pass that cost on to consumers in the form of higher borrowing costs. As well, investors can expect to receive higher interest rates on bonds and certificates of deposit.
The prime rate is typically about 3 percentage points over the federal funds rate, and it's an important benchmark rate for loans. The prime rate is calculated by The Wall Street Journal, and that number is tracked on Bankrate's Rate Watch page.
Banks may also set CD rates based on Treasury security yields. Typically, the 10-year Treasury note is watched to determine the direction of yields on bonds and CDs.
How is the yield on Treasury notes set? Good question.
The federal funds rate does affect 10-year Treasury note yields, according to a 2005 paper by Kane Snyder, "How the federal funds rate affects 10-year Treasury bond yields."
But there are many other variables that influence yields, including unemployment. Demand for Treasury securities can push yields up or down as well. Recently the yield on Treasury bonds has been going up. This week the 10-year Treasury is yielding 3.60 percent, up nearly 20 basis points from one month ago.
A story on CNNmoney.com in early February, "Bond shoppers: 10-year yields pushing near 4 percent," predicted that the second half of 2011 could see 10-year Treasury yields hitting 4 or 4.5 percent. And that could be good news for CD investors.
When do you think CD rates will go up?