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It's been a bad week for CD savers. As expected, volatility kicked up a gear this week on certificates of deposit.
Averages declined by 12 basis points across all maturities. A basis point is one-hundredth of a percent.
Although this was not the level of volatility seen after the Fed's surprise rate cut Jan. 3, the cumulative effect has now brought CD yields to their lowest point since the summer of 1999.
At that point, the fed funds rate was on the way up, as the Fed had increased rates twice, increasing to 5.25 percent in August 1999.
Currently, the fed funds rate is 5.50 percent, so on that basis it would appear CD yields at least partly reflect another expected rate cut.
The plummeting yields seen since mid-December are not confined to just time deposits. Money market accounts (MMAs), which maintain complete liquidity and also provide investors with limited check-writing access, have also seen yields declining.
Savers, particularly fixed-income investors who rely on interest income from such cash investments, will continue to feel the pinch of declining yields as lenders remain concerned about the higher possibility of default as the economy slows.
This can put a damper on loan demand, even as rates fall and more consumers and businesses, in theory, can borrow. Loan demand plays an important role in what institutions are willing to pay for deposits.
But as usual, the interest rate sword cuts both ways.
As savers frown, home equity borrowers smile.
People who have home equity lines of credit (HELOCs) enjoyed the largest weekly drop seen to date.
Some institutions that reprice such products only at the beginning of each month have now repriced to reflect both January rate cuts.
Other repricings will continue to take place over the next few weeks, but not to the extent seen this week.
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