Deposit Funding Compass Week of August 16, 2023

Traders betting that interest rates in the US will remain higher than inflation far into the future drove 10-year real yields to a 14-year high Monday. The “real”, or inflation-protected yield on 10-year Treasury debt climbed more than 6 basis points to 1.84% in late New York trading, the highest level since 2009. Nominal Treasury yields also climbed, with the 10-year rate briefly exceeding 4.21% for the first time since November, as traders pared expectations for Federal Reserve interest-rate cuts next year.

CD market participants have been active the first two weeks of August as spread compression has followed a slight downturn in issuance last month, and the aforementioned rise in treasury rates.  More often than not we observe a lag in CD funding costs in relation to abrupt treasury moves and at least for this week “all in” CD rates are closer and in some cases cheaper than commensurate to US sovereign debt yields.  Though this anomaly is often fleeting, for now there is relative value when compared to where funding spreads have been most of the year.
  
With the curve still largely inverted we have encourage issuers who are focused on short term tenors to take advantage of call optionality and offer longer dated maturities at the same or similar cost to constantly rolling a 3, 6, 9, or 12mo maturities.