Low CD Rates: Lending Drought and Savings Monsoon

Click to enlarge.

The data in red (left scale) shows bank credit of all commercial banks divided by total savings deposits at all depository institutions. Think of it as a lending to savings ratio proxy.

The data in black (right scale) shows the 5-year CD rate (national rate of banks).

The data in blue (right scale) shows the 5-year treasury yield.

I would argue that the red data is a primary driver of interest rates (perhaps not the only one). All things being equal, as people deposit more money in banks relative to what banks are lending, interest rates go down. Put another way, banks have no incentive to offer great interest rates on savings when there is so much money being deposited.

Note that the 5-year treasury (in blue) has recently tried to diverge from this pattern. This is not its first attempt. Its last attempt (back in 2011) failed miserably. For what it is worth, I'm not a believer that it will succeed this time either. Rising interest rate environment? I don't think so. Could be wrong of course. Time will tell.

And lastly, note the extreme lack of a recovery in the lending to savings ratio (in red). It's just been down, down, down.

Here is a closer look at that lending to savings ratio over the past year (using weekly data instead of smoothed semiannual data).



Once again, it's just down, down, down. The lending drought and savings monsoon continues. Those patiently waiting for higher CD rates and higher 5-year treasury yields may be very disappointed. But what's new? They've generally been disappointed for 30+ years.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart #1
St. Louis Fed: Custom Chart #2