Where to, Oh CD Interest Rates?

interest ratesAs the interest rate yields on government Treasury bonds go up or down, so go the yields on government Treasury bills, bank money markets as well as CD interest rates.

Historically, the yields on government 10-year Treasury notes generally matched the nominal GDP growth rate of the US economy. So if the GDP grew 3.5% on average, which is what most economist expected, you’d expect a bond rate of 3.5% PLUS whatever the inflation rate was, say 2.5% or so. Pricing it out, that would give you a bond rate of around 6% which was the historic norm.

Flash forward to today where you have a 2.5% growth rate for America’s GDP, and a 0% inflation rate that together are pricing T-notes at around a 2.5% yield. People are rushing to buy bond funds, but is this wise, … should you be a contrarian?

Think about this question: What country will loan you money at a 2.5% interest for the next 10 years? This price means that the market is expecting inflation to remain near zero for a decade. A decade! Impossible. Just ask the residents of China, Argentina, India, Australia, Brazil, … about inflation and their desire to give you money at 2.5% for 10 years. Here’s a look at Global Inflation Rates:

India 13.7%
Argentina 11.2%
Russia 5.5%
Brazil 4.6%
China 3.3%
UK 3.1%
Australia 3.1%
Euro zone 1.7%
USA 1.2%
Japan -0.7%

Frankly, the US should be borrowing everything it possibly can at rates this low. That’s why corporations are raising so much cash right now because at rates this low, they’ll never see it again in the future.

Since inflation has already broken out in other countries, you can certainly expect it to come here eventually but that will happen at the very same time we are having downwards wage pressure and higher taxes. In addition, the overhang in housing supply is so large that over the next few years you simply cannot expect a big return to the old real estate days of skyrocketing prices.

The conclusion is, at some point in time the interest rates will have to go up. We’ll see certain assets deflating in price (if no one can afford housing prices they can drop another 20%) while the cost of living may rise and you have less to live on. So locking in long term CD interest rates right now may be a problematical concern for some people.


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