Wednesday, February 20, 2013

CD Rates in 2013 Offer Little Return

So here we are another year gone by and CD rates in 2013 continue to offer little in return in terms of yield. Although the outlook for the economy is quite a bit better this year than last year we still have a great uphill climb to make before savers begin to see recovery in their fixed income investments. Here are some thoughts to guide you through the next few months.

FED POMO / QE3 Continues to Keep Yields Low

Face it: the Federal Reserve is the ultimate competitor for interest bearing assets these days, and with unconstrained ability to buy assets (effectively) they can and will keep yields low indefinitely until the economic recovery is complete. The end of Operation Twist (neutralized debt purchases) also meant the beginning of QE3 - which includes not only $40 billion / month of treasury buying, but also another $40 Billion (+/-) of MBS (mortgage backed securities) buying - effectively absorbing the safest assets for yield in the market. So long as the FED POMO operations continue to buy fixed income securities CD rates will remain exactly as they are - effectively yielding nothing.

Any Signs of Hope for Increased CD Rates in 2013?

Thus far we have seen open-ended buying in the fixed yield market from the FED. Even though the US Treasury Department continues its need to borrow at unprecedented levels the continued presence of the Federal Reserve in the market bullies out any and all other reasonable offers for government assets. Some encouraging news RE: CD rates is the wording of some of the recent FED minutes indicating reduced appetite for monetary stimulus amongst the Fed Governors. Having said that until the US budget talks are settled and uncertainty is reduced regarding the future economic expectations I think we will see little movement away from monetary stimulus. If the Fed does threaten to end asset purchases / QE3 - it might be time to invest in put options because it is entirely likely that the recent stock market run-up is fueled entirely by Quantitative Easing.

What to Look for in the Coming Weeks

As we look ahead to the future it is most important to continue to monitor the Fed minutes for any sign of reduced monetary stimulus. As mentioned above we won't likely see any change in policy from the Fed until Congress and the President come to grips with the coming sequestor on the Federal Budget. If budget talks between the President and Congress show some signs of progress then maybe, just maybe there will be some light at the end of the tunnel for savers like you and me. ...I ain't holdin' my breath.

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