At Freedom Capital, we are seeing some CDs and US Agencies yielding less than comparable US Treasuries, a dynamic worth understanding. CDs and US Agencies typically carry slightly more credit risk than Treasuries, so conventional wisdom would suggest they offer higher yields in return. However, a number of factors are causing them to offer lower yields.
US Treasury yields have moved sharply in recent weeks, rising between 25 and 50 basis points since the beginning of March. The escalating conflict in the Middle East has disrupted energy markets and pushed Brent crude past $100 per barrel. Rather than triggering the traditional flight-to-safety rally in Treasuries, inflation concerns have taken center stage and Treasury yields are reflecting that shift in real time.
Because Treasuries trade in one of the deepest and most liquid markets in the world, their yields adjust quickly to shifting macro conditions. US Agency yields, while also traded in reasonably active secondary markets, do not carry the same depth of liquidity, meaning they can lag when the broader environment moves fast.
CD yields, however, are driven by an entirely different set of forces. Banks set CD rates based on their internal funding needs. When deposit levels are healthy, there can be little incentive to compete for new deposits by raising rates, even as the broader rate environment moves higher. Furthermore, any rate adjustment typically requires internal review and approval, a process that can take time and leave CD yields trailing where the market actually stands today.
Sources: CNBC
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