To compete with skyrocketing Treasury yields, banks are now offering 4% and more on “courted” 6-month to 5-year CDs

Holy-moly mortgage rates are approaching 7%.

By Wolf Richter for WOLF STREET.

Earning 4% without taking credit risk would normally seem like a lot. But these are not normal times, and the rate of inflation is more than double that rate. The Fed pulled out of the Treasury and mortgage-backed securities markets as part of its QT, and it raised its key short-term rates to over 3%. Treasury yields are now 4% or more for maturities of one to five years.

And banks now have to compete with this and are now offering ‘courted’ CDs at rates above 4% on maturities of six months to five years. For yield investors and savers, if they take advantage of these rates, their money is wiped out by inflation at half the rate it would be wiped out in their regular bank account. But if you have to borrow money, for example to buy a house, it now becomes much more expensive.

Treasury securities: maturities of 1 year to 5 years at more than 4%.

The 6-month Treasury yield today is up slightly to 3.9% so far, the highest since November 2007, from nearly 0% less than a year ago:

The 1-year Treasury yield has risen to 4.14% at present, the highest since November 2007, from nearly 0% less than a year ago:

The 2-year Treasury yield is now at 4.21%, the highest since September 2007, and up from 0.25% a year ago.

The two-year yield began to rise around this time last year, as it began to price in the Fed “pivot”. By the end of 2021, it had fallen to 0.73, while the key Fed rates were still close to 0%. But the Fed had already started to “reduce” its asset purchases and was talking about rate hikes in the future.

The 5-year Treasury yield pushed up to 4.0% at the moment, barely there:

Banks now compete for deposits with Treasury securities:

Buying Treasury securities is now easy. People can buy them through their broker in the secondary market or sometimes at auction. And people who open an account on can buy them directly at government auctions.

And the yields offered by Treasuries with maturities of up to five years are what banks must compete with if they want to attract new liquidity.

Banks have noticed that their customers are moving money from their bank accounts into treasury securities and treasury money market funds, because they’re getting almost 0% in the bank, and they’re getting about 2% in a fund Treasury money market and 4.14% on one-year Treasury securities.

Banks therefore begin to compete for deposits. And they do it with “brokered” CDs, which are FDIC-insured CDs that banks don’t offer to their existing customers (they still get close to 0%), but do offer new customers through brokerage accounts. where these CDs can be purchased like stocks.

Banks offer these CDs through brokers, not to their own customers, because they don’t want to pay all their existing customers 4% interest on their deposits, but they only want to pay 4% on the fresh money they attract, while they continue to pay their loyal customers at almost 0%.

For banks, traded CDs are a form of “speculative money” that comes and goes, unlike regular bank deposits, which tend to be stickier.

So I checked with my broker today. And that’s what they offer in terms of traded CDs. Here are the highest bank interest rates I’ve seen since 2008:

  • CD 6 months: 4.04%
  • CD 9 months: 4.12%
  • CD 1 year: 4.05%
  • CD 2 years: 4.20%
  • CD 5 years: 4.30%

Some CDs are ‘redeemable’ and may offer a higher rate but with the risk of being ‘redeemed’ if interest rates fall. It is good to check so that there are no surprises.

Holy-moly mortgage rates are approaching 7%.

The average 30-year fixed mortgage rate climbed to 6.70% today, according to a daily measurement from Mortgage News Daily. This is the most immediate measure we have of the mortgage market.

Freddie Mac’s weekly measure, released Thursday, and based on mortgage rates earlier in the week, jumped to 6.29%, the highest since November 2008.

But Freddie Mac’s weekly average was based on mortgage rates in effect before Wednesday afternoon – before the Fed announced a 75 basis point rate hike and projections for further rate hikes of 125 basis points. this year, which could bring its short-term policy to around 4.4% by the end of 2022.

For people who took out mortgages in the 1980s and early 1990s, something like 6.7% might still seem pretty low, or incredibly low, given that inflation is over 8% , but house prices are now in the ionosphere, inflated by years of the Fed’s interest rate crackdown and QE, including the Fed’s purchases of mortgage-backed securities. And financing a house at those ionospheric prices today at 6.7% is an entirely different matter than financing a house in the 1990s at that kind of interest rate.

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