Spread Between Savings and CD Rates Widen - Weekly Rate Update October 2

Is the economy headed for a recovery or are we getting ready to sink back into recession? Is the stock market rise for real? Since reaching a bottom of 6,448 in March the market has risen to nearly 10,000 in late September (9,820). Despite the markets rise, bond yields have remained flat.

In an article entitled, "What the Treasury Bond Market Tells Us About the Economy" Sam Cass from BestCashCow writes:

"So, I'd say we have an ecomomy that is not as strong as the last couple of months has made appear, a stock market that is ahead itself and that will fall back, and with banks, Wall Street, and foreign investors buying and holding Treasuries as the safest investment in an otherwise risk-fraught world.

I've learned that divergences in assets never last. Either the stock market must come down or Treasury yields must go up. I'm betting both will happen."

Bond yields are generally considered an even better leading indicator of future economic conditions than the stock market.

Looking at the yield curve we have developed for deposit accounts, we can see that the spread between savings rates and 36-month CDs is nearing its high since we began tracking last year. While longer term CD rates have remained stable and even gone up a bit, short term CDs and savings account rates continue to drop. The yield curve is steepening which is normally a sign of economic recovery and expansion.

All of this seems to fit a scenario described by Dr. Doom, otherwise known as Nouriel Roubini. He said today that "there are signs right now that the recession might be close to over,” and that there remains a “a risk” of “a double-dip recession.” What the data seems to indicate is an improving economy, but one that is still teetering that that could go back into a recession once the government stops spending money or if there is another shock to the system. A fragile economy.

For now, rates seem to be watching and waiting.

Savings rates inched down 3 basis points in the past week while 36-month CDs crept up 3 basis points. That created the 6 basis point widening between the two products. Both 12-month CDs and 5-year CD rates stayed the same.

Like the economy, rates seem to have pretty much hit bottom. The question now is when they will go back up. It may be some time.