It's been a slow week on the economic news and rate front as bankers head for the hills and take an extended vacation. When I worked at a bank, I remember that the week between Christmas and New Years was slow. The bank was manned by a skeletal crew and for the most part, no significant decisions were made.

On the economic front, the biggest news of the past week has been the steepening of the Treasury Yield Curve to record levels. The yield is considered by many to be the most important economic indicator. My economics teacher in business school harped on its importance. The curve plots the yields of Treasury bills, notes, and bonds. A steep yield curve indicates that short term rates are low and long term rates are higher. A steep yield curve is usually a sign of an impending economic recovery as investors anticipate growth and inflation and believe longer-term rates will go up as demand for capital growns. An inverted yield curve (short term rates are equal to or higher than long-term rates) is a strong sign of a recession, since investors are betting that growth, inflation, and rates are coming down in the future.

Over the last week we experienced the steepest yield curve on record. Usually this would be a strong signal of future growth but there is a wrinkle this time. Massive government borrowing may be distorting the yield curve. Since the government needs to borrow so much money, many investors are anticipating two things: 1) inflation as the government money fuels a recovery; 2) rising Treasury rates as the government has to provide a higher rate to convince investors to soak up so much Treasury demand.

The yield curve is important for savers for several reasons. First, it directly influences the rate you'll receive on money market funds and some longer-term CDs. Money market funds invest in Treasuries and other government and municipal bonds which often take their cue from Treasuries. Second, if you invest in Treasuries, the yield on different maturities is important. Third, it provides some indication of what's going to happen in the future. Right now, the steep yield curve is indicating that rates are going up.. So, as we've said before, it might not be the best time to lock up money in a long-term CD. In 12 months you might be able to get an even better rate. Lastly, Treasury securities serve as benchmarks which help to determine mortgage rates. It's no coincidence that record low yield in Treasuries correspond to record low mortgage rates. If Treasury yields go up, so will mortgage rates.

So, what we're glimpsing in the yield curve is the eventual increase in rates for savers (good news) and the increase in rates for borrowers (not good news).

CD and Savings Rates

As long as the Fed keeps its Fed Fund rate at 0-.25% we're not going to see any significant increase in savings and CD rates. While Treasuries can serve as a forward-looking indicator, savings and most CD rates are pegged to the Fed Funds rate and not from the Treasury bond market. Savings and CD rates continue their slow glide to oblivion, although as we mentioned, rates were pretty unchanged over the past Holiday week. Savings rates stayed steady at 1.57% APY. 1-year CD rates dropped by one basis point from 1.96% to 1.95% APY. This marks the second week in a row that both savings and 1-year CD rates have not dropped or hardly dropped. 3-year CD rate rose 1 basis point to 2.66^% APY and and 5-year rates continued their recent slide, down 3 basis points from 3.21% APY to 3.18% APY.

Like the Treasury yield, BestCashCow has developed its own yield ratio for deposit accounts - the spread between savings rates and 36-month CDs. In some ways, this ratio is purer because it cannot be influenced by government debt, Fed Treasury purchase programs, and other attempts to manipulate rates. As you can see below, the ratio between savings accounts (a short duration deposit account) and 3 year CDs has dropped slightly over the past three weeks. It's still at a very elevated level though, mimicking the Treasury curve. We'll be watching how the ratio develops over the next month to see if it provides any additional clues to the state of the market in 2010.

At this point it's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. Many depositors may be willing to lock money away for 5-years at close to 3%. To me that's just not enough of a return for that period of time. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

According to Freddie Mac's weekly survey, 30 year mortgage rates rose by 11 basis points from 4.94% to 5.05%. It's the first time since October that the average 30-year mortgage rate has gone above 5%. Data from th BedsCashCow rate tables show that average mortgage rates on 30-year mortgages (the most popular mortgage taken) shot up from 4.95% to 5.193%. This mimics the increase we've seen in longer-term Treasuries. As the Fed ends its purchase of mortgage-backed securities and Treasury securities, we'll probably see rates continue to rise. From all indications, mortgage rates are going up, which is bad for homebuyers and the general housing market.

Frank Nothaft, a Freddie Mac Vice President had this to say about rates going above 5%. "Although interest rates for 30-year fixed-rate mortgages are above 5 percent this week for the first time since the end of October, they are still around 0.5 percentage points below this year’s peak set in mid-June. ARM rates increased by a lesser amount as the market consensus calls for no rate hikes by the Federal Reserve in the immediate future."

You can compare the best mortgage rates in our new mortgage section.

Every now and then the mainstream media will do an article covering the hatchet job that the Fed has done on the savers of this country. Today they printed one such article, entitled At Tiny Rates, Saving Money Costs Investors.There's really nothing in the article that we haven't said a million times before: the Fed is reinflating the economy at the expense of savers, the very investors who were least responsible for the economic collapse. The elderly who lived off a fixed income are being especially hard-hit as saving and CD rates tumble from 5-6% to under 2%.

Perhaps the most interesting part of the article was the following quote:

"Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

I've written about this before also and it's appalling. What the banks do is borrow money from me and you, or even the Fed for 1% and under and then lend it out at 5-6%. They can't lose money. Banks are reporting profits because they are in a no-lose interest rate environment and also because they changed the accounting rules to make their bad assets disappear. You'd think they'd be sharing the wealth, but instead, credit is tight, and the banks are raising credit card rates and lending standards.

We help them recapitalize and strengthen and they stick us with the bill. Oh, and they pay themselves nice fat bonuses. Give me a break. A high schooler could recapitalize a bank in today's interest rate environment.

Is there anything you can do? Yes, if you plan to deposit money, make sure you deposit it into a high yield savings or cd account. You might as well get the best savings rate or best cd rates you can. Reward the banks that are willing to pay a bit more for your hard-earned cash.

It was a relatively quiet week as markets and consumers ready themselves for the Holiday season. The biggest news had to do with the increase in the yield between the 2 year Treasury Note and the 30 year bond. The yield curve earlier in the week was the steepest it's been since 1992. What's behind this? The Fed is keeping short term rates low. Long-term rates are rising though as investors look ahead to increased Treasury security offerings and investors become more and more concerned about nflation. Still, for all the worry about inflation, there is remarkably little on the horizon. As this Wall Street Journal article indicates:

"Based on prices of U.S. Treasury Inflation-Protected Securities, where principal and interest payments are adjusted for changes in the CPI, inflation is expected to be less than 1% in 2010, says Michael Pond, Treasurys and inflation market strategist at Barclays Capital.

Looking a little bit further out, TIPS prices suggest inflation is expected to be 1.5% per year over the next five years and roughly 2.1% over the next 10 years, according to Barclays. "

Some investors feel that TIPS are just cheep and haven't yet priced in future inflation. Maybe so. But there is still tremendous slack in the economy and it is far more likely we'll see an asset bubble before we see a jump in CPI inflation.

The impact in the steep yield curve can be seen in the dichotomy between deposit and lending products.

CD and Savings Rates

Short term and medium term rates remain low and dropping.

All savings and CD rates dropped last week. Savings rates dropped last week by 4 basis points from 1.61% APY to a new low of 1.57% APY. One year CD rates also dropped by 4 basis points to 1.95% APY while 3 year CD rates dropped by 8 basis points to 2.72% APY. Five year rates dropped by 9 basis points from 3.35% APY to 3.26% APY. It's uncharacteristic for 5-year rates to drop by so much and after rallying a bit from summer lows of 3.22% APY are closing in again on that level.

Looking at the yield ratio we have developed for deposit accounts, the spread the spread between savings rates and 36-month CDs came down slightly due to the drop in 3-year CD rates. This drop in longer-term CD rates reverses the slightly upward movement that we saw since the summer. It's possible we'll see 5-year CD rates below 3% APY in the next couple of months if the current trend continues.

My guess is that the downward blip in 3 and 5 year CD rates was a temporary phenomena. Treasury notes and bonds saw their yields rise last week and as the Fed begins to remove stimulus it's easier to see rates going up in the future than going down. It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

Longer term mortgage rates for the first time in several weeks.

According to the BestCashCow rate tables, the average 30-year fixed rate mortgage rose from 4.957% the previous week to 4.971%. The fifteen-year fixed-rate mortgage average went from 4.4% to 4.43%. While mortgage rates rose on most products, they are still close to historic lows. This is a good time to refinance and these rates won't last once the Fed ends its mortgage and Treasury Bond buybacks. Many analysts expect rates will increase into the 6% range once this happens.

You can compare the best mortgage rates in our new mortgage section.