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CD rates are a changing

I have replaced much of my bond allocation with CD's. I buy brokered CD's through Schwab. As recently as Nov. 15 one could get 3.55% for five years. Today to get that same 3.55% one would have to go out 10 years! Shorter term certificates are also significantly lower. I am aware that since Nov. 15 the Fed RAISED rates by .25% and hinted at a change of policy going forward. I am wondering if Banks are sensing a lower demand for loans going forward and thus are not so eager to take money in? In other words might there be a greater significance than just a dip in rates? Could it imply a decline in economic action going forward? After all,,, to a bank in the business of lending, deposits are inventory. They seem like they are way less inclined to increase their inventory.


  • @larryB, I noticed exactly the same with new offerings from Schwab. I'm guessing banks are either assuming rate hikes will slow or they are holding back higher rates on new issues until hikes are better understood. I've been buying 1-2 year CDs but lately the rates aren't that much better than the MM.
  • Between Nov 2 and Nov 9 (inclusive), 5 year Treasuries paid above 3%. They have not paid as much as 2.5% any day this year so far.

    Treasury rates are set by the market, not by the Fed and not by retail banks. I generally expect bank rates to track Treasuries.

    The Treasury yield curve and thus the CD curve is flattening. Short term rates are being pushed up by the Fed, and middle-to-long term rates are being pushed down by the market ("Could it imply a decline in economic action going forward").

    It's not all bad news. Intermediate and long term bond funds are up around 2% over the past three months, with government bond funds doing even better.
  • edited January 2019
    @msf got it right. Beat me to a response. But the role of the Fed in setting rates is greatly misunderstood. They set the overnight lending rate among Federal banks (Hope I put that correctly). Their direct influence is mostly confined to the short end of the yield curve.

    Now, that can affect longer rates in a number of ways. Significantly, a lower Fed rate might imply looser Fed policy and easier money. That perception might actually drive up rates farther out on the curve as investors begin to fear inflation and / or an overheating economy. What I suspect happened here is that with “risk-off” (money fleeing stocks and high yield bonds) over the past several months, the “price” investors are willing to pay for high quality / government credit has increased.

    Investing 101: Bond yields and prices tend to move inversely to one another. That means that the more investors bid up the price of bonds (by demand) the lower the rates go.

    The linked chart reveals two things: First, very short-term rates (out to 1 year) have risen over the past 12 months as the Fed raised the overnight rate. But at the 3 and 5 year end, rates have fallen over that time as investor demand pushed up the price of the underlying securities.
  • Like larryB, I also sold my bond funds to buy brokered CD's. I was buying mine at Vanguard, but only 6 mo. to 2 year. I also found in the last couple weeks that the rates have gone down.

    At the same time, the rate in my settlement account at Vg have gone up, making for a very small spread between the two. While I look at the rates every day, I stopped buying brokered CD's for now.

    I'm willing to wait. Or if my equity funds take a much bigger decline, I could aim some bucks there.
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