CD Rates May Rise If Treasury Bond Demand Falls
Posted on December 29th, 2009
The U.S. government is scheduled to sell a total of $118 billion in U.S. Treasury bonds this week in order to finance government spending. If you are looking for CD rates to rise, Treasury bond auctions matter to you.
The first auction took place yesterday, in the form of $44 billion in two year notes. Attendees of the auction noted that demand was “lackluster.” Also notable was the fact that the percentage of foreign buyers dropped, but the percentage of American money managers buying was up.
Who buys Treasury bonds and at what prices matters to CD rates because CD rates paid by banks are, generally speaking, closely tied to interest rates paid by the government. After all, banks that issue CDs are essentially competing for investors with the government.
Conservative investors frequently hold both Treasury bonds and CDs in their portfolios, making this natural correlation even more important for individual investors who hold both asset types.
If demand for Treasury bonds falls, the government is forced to pay a higher interest rate in order to entice investors to buy the government debt.
Likewise, if demand for CDs falls, banks are forced to pay higher interest rates to attract depositors.
It’s the law of supply and demand in action–and as there is plenty of supply hitting the market this week, it will be interesting to see how demand stacks up.
Source: CD Rates May Rise If Treasury Bond Demand Falls
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Tags: Bond, Cd Rates, Treasury Bond
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