SAN ANSELMO, Calif. — The downward trend in deposit rates that began five years ago may be reversing course, according to one new analysis. But not everyone agrees.
Dan Geller, EVP at Market Rates Insight, based that assertion on the fact that institutions in Illinois, Massachusetts, Michigan, Ohio, Pennsylvania and West Virginia increased their long-term CD rates during the first quarter of 2012, the first time in five years Geller has seen CD rates rise.
However, the increases contrast with declining CD rates in all other states during that same period, which led to a decline of four basis points in the national average interest rates on CDs. During the first quarter of 2012, the national average rate for CDs dropped from 0.55% to 0.51%.
A 'Trial Balloon'
"I would say that this is a trial balloon by financial institutions in those regions to see if the improvement in the economy-declining unemployment rate, higher consumer spending etc.-will entice some people to opt for longer-term CDs with slightly higher rates," Geller told Credit Union Journal. "If this experiment is successful, we will see increases in long-term CDs spreading to other states as well."
Geller said he termed this a trial by financials because when banks attempt a new interest-rate strategy, they typically do so in selected areas, not across the board.
Market Rates Insight data showed Illinois had the biggest increase, 8 basis points on the five-year CD for an annual percentage yield of 1.19%, and a 6-basis-points increase on the four-year CD for an annual percentage yield of 0.88%. Five-year CD rates in Massachusetts increased two basis points to an annual percentage yield of 0.86%. The state also showed a one-basis-point increase in the one-, two-, and three-year CDs to an annual percentage yield of 0.31%, 0.34%, and 0.54% respectively. Michigan had a 2 BP increase in the three-year CD to an annual percentage yield of 0.54%, and a 1 BP increase in the one-, two- and five-year CDs to an annual percentage yield of 0.24%, 0.39% and 0.93% respectively.
"Credit unions absolutely have to watch this," advised Geller. "They should pay very close attention to long-term CD rates in their own markets to see if there is any upward movement by their competitors. If there is, this might be an indication the increase is spreading to other regions and eventually nationally."
Need More 'Evidence'
Michael Moebs, economist and CEO at Moebs $ervices, Lake Bluff, Ill., is not certain the six-state jump in CD rates indicates a trend. "If this were a trend, we did not get any indication of it in the Federal Reserve Open Market Committee minutes released last week. The Fed stayed the course on interest rates and is very concerned about inflation. Yet Mr. Geller might have detected something, and therefore this is something to consider. But I think we need more solid evidence."
Moebs did point out that U.S. financial institutions have shown increases in the last two quarters in "near money"-checking and insured savings-plus massive increases in reserve positions. "Both of these would point to higher rates," Moebs told the Journal.
