How Market Turmoil Could Affect CD Rates

Although today – a day following the 6th worst point decline in the DJIA in the last 112 years – seems to be a positive one, many investors are still seeking out alternative investment options than those offered by wall street. And while yesterday marked the single biggest market loss since 2008, this time around investors are left with little in the way of returns for safe storage on excess cash.

I think most analysts would agree that our present market crash exists under a slightly different set of variables than what we observed in ’08. For starters, interest rates were no where near the level we see today. In 2008, consumers were flushing funds out of the market only to streamline them to FDIC insured, safe-haven, deposits and savings accounts – which were providing unprecedented annual percentage yields. Today, the same money getting flushed out of the markets can only turn to bank CDs that, in some instances, aren’t even providing real positive interest.

Two likely outcomes for bank CD rates:

1) Banks and credit unions will start competing once again for consumer deposits (ie 2008) due to an increase in demand of FDIC insured investments stemming from fear on wall street and US credit downgrade.

While fixed income investors would gleefully accept this outcome we find it unlikely. After our coverage of New York Mellon Bank issuing fees on top of their already horrific interest rates (which actually sums to negative interest), we find little evidence of any motivation amongst banks to compete for institutional or consumer funds in the form of higher APY’s.

2) Banks and credit unions will be overwhelmed with institutional and consumer cash, regardless of interest rates, due to lack of safe haven alternative investment options both in the US and abroad.

This seems like the likelier occurrence. After yesterday’s market loss, the price of Treasury’s rose dramatically while the yields provided on them tanked. To get a better idea of the short term trend, 10-year Treasury notes fell to 2.34 per cent from 2.57 per cent on Friday even before Monday’s market free fall in which demand for Treasury’s remained very strong.

In an environment where interest rates seem to be stuck near zero, we see little room for optimism that the landscape will change in the short term.