Mortgage Rates In Spotlight, But CD Rates Are Also Sliding

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SAN ANSELMO, Calif.-Declining mortgage rates may be getting the attention, but rates being paid on certificates of deposit (CDs) nationally also continue to slide.

During July, the average rate on a five-year CD declined two basis points from one-month earlier to 1.92%, while the four-year CD was paying just 1.63% (down three BPs) and the three-year was paying 1.37% (down three BPs). The data was complied by Market Rates, International (MRI).

MRI reported the decline in the rates of regular-long-term CDs was wide spread across many regions. The repricing volume, which measures the number of CD-rate changes, was extremely high in long-term CDs. For example, 98% of all four-year-CD rates changed last week, 96% of all five-year-CDs, and 89% of all three-year-CD rates changed last week. Changes in the rates of short-term CDs, one-year or less, were more moderate.

Traditionally, deposits pricing followed the economic model of price elasticity of demand, which states that when interest rates fall, balances drop as well-and vice versa. The opposite of elasticity is inelasticity, when balances do not fluctuate when interest rates go down. Yet the new dynamics between interest rates and deposit balances can only be described as "abnormal" and trending toward "reverse elasticity."

For example, a recent analysis by Market Rates Insight (MRI) found that balances of transaction accounts rose by $281 billion despite a decline of 1.19% in the interest rates paid on transaction accounts. Similarly, another analysis shows that overall deposit balances in institutions insured by the Federal Deposit Insurance Corp. have risen continuously despite a steady decline in deposit rates since the fourth quarter of 2006.

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