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Why are CD rates falling?

By Sheyna Steiner · Bankrate.com
Thursday, June 24, 2010
Posted: 3 pm ET

CD rates fell again this week in the weekly interest rate survey. Though one-year CD rates did rally enough to muster up one basis point, maturities between two and five years fell. Not by much, five-year CD rates lost 3 basis points to 2.02 APY.

With short-term interest rates set by the Fed as low as they can go, why do CD rates keep slipping?

To answer that question I went to someone much more knowledgeable in the ways of rates and the economy, Bankrate's senior financial analyst, Greg McBride.

5-year CD rate

5-year CD rate as of June 23

According to McBride, one reason that CD rates continue to be pared away basis point by basis point is that Treasury yields are also being pushed down.

"Treasury securities continue to fall and Treasury securities are the tide that either raises or sinks all ships," McBride says.

When many people want to buy bonds, the price goes up. When the price goes up, yields go down.

When Treasury prices go up, it generally means people are wary of the stock market and too skittish to risk the volatility.

"In a nutshell it's the outlook for economic growth and inflation. In times when investors are nervous as they are right now, they tend to flock to the safety of a U.S. government bet. It's called a flight to quality," McBride says.

"Over the last week if you look at Treasury yields, yields on two-year through five-year maturities dropped and in this week's rate survey yields on two- through five-year CDs dropped. Other instruments whether its other forms of borrowing or other fixed income instruments are priced at a spread relative to Treasuries." he says.

So that's happening. But there's another factor that pushes CD rates down. No one is beating down bank doors for loans recently, which means they don't need to attract to deposits at the moment.

"Their CD offerings reflect that," McBride says.

But there are banks out there that are offering at least twice the Bankrate national average yield.

Use the Bankrate CD database to find some of the highest yields in the country. Shopping around is the CD investors best weapon against lagging yields.

It’s a rarity in the investing world that you can get additional return without having to take on additional risk, just from shopping around," says McBride.

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