Long-term bond yields are on the rise, along with some other important interest rates, such as mortgage rates. The question for bank depositors is: When will savings account rates follow? A look at the history of long-term and short-term interest rates suggests that while it is a good sign for long-term rates to be rising, they could continue to go their own way for a while before short-term rates start to follow.
A comparison of short- and long-term ratesTreasury securities are issued with maturities measured in everything from months to several years. Long-term Treasuries tend to have more in common with long-term bank rates such as mortgage rates, while short-term Treasuries tend to have more in common with short-term bank rates, such as savings and money market rates. Understanding those relationships is significant in the context of changes over the past few months. Ten-year Treasury bond yields rose by 54 basis points over May and June, while three-month Treasury yields declined by 1 basis point. That helps explain why mortgage rates have jumped, while most savings and money market rates haven't budged. The next question, then, is: To what extent can long and short rates continue to go their separate ways? The difference between the two is referred to as a spread, and as a result of the changes over the past months, that spread has widened by 55 basis points, from 1.7 percent to 2.25 percent. Over the past 30 years, that spread has averaged 1.83 percent, meaning that the past two months have seen that spread go from below average to above average. How much wider can that spread get? The widest in the past 30 years has been 3.69 percent. Putting this all together, an above-average spread means that long-term and short-term rates are likely to move closer together -- eventually. However, that spread can still widen quite a bit before that happens.
Finally, when long and short rates do start to come back together, this can happen either by short rates rising or long rates falling. Whether long rates will pull short rates up depends on whether the economy continues to improve.
Three important economic events in JulyThree things to watch for in July, in terms of the economy's progress:
- The July 5 release of employment data for the month of June.
- The July 16 release of inflation data for June.
- The July 31 advance estimate of second quarter Gross Domestic Product.