"Too big to fail" impacts CD rates because the large, systematically important banks gaining deposits have little incentive to raise rates. For healthy banks such as Wells Fargo, inflows of deposits at any rate also indicate a continued flight to safety among consumers.
In recent quarters, for instance, Wells Fargo management pinned some deposit inflows on the struggles of European and emerging-market banks.
A sudden jolt in June to Wall Street's expectations of how the Fed may withdraw from its extraordinary support to financial assets has impacted mortgage rates and Treasury yields. Speculation among traders has shifted to when, not if, the Fed will taper its monetary stimulus and raise short-term interest rates.
It's important for investors to remember that a heavy number of participants actively trade Treasuries each day on the open market, while individual banks decide where to set CD rates."CDs are not like a traded security, and so the banks are a little insulated from the market," said MoneyRates.com's Barrington. "CD rates do not move up and down every day." Finally, banks use CDs to support lending practices. With the Fed purchasing $40 billion a month in mortgage-backed securities and $45 billion a month in agency-issued longer-term Treasuries, the central bank acts as one of the banking industry's biggest clients. With the Fed giving the most cash to banks these institutions simply have less of a need to attract new depositors with more competitive CD rates. The spread continues to widen between the 10-year Treasury note and the national average rate on 5-year CDs, and it's important for investors to understand the divergence if they're looking to put their cash to work. -- Written by Joe Deaux and Antoine Gara in New York. >Contact by Email. Follow @JoeDeaux
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