Are the “good old days” of the yield curve making a comeback?

The good oldie times”.

Now, that’s a sentence I’ve heard too much.

Whether on the radio, television or from my grandparents, it is a phrase that implies that the past was better than the present. Heck, even my parents reflect on the “good old days.”

But I remind my kids all the time that times are so much better now than ever.

There is always evil lurking around the world, but when it comes to getting the most people out of poverty and living a decent life today and hopefully for the foreseeable future, life is better than anything we’ve ever had. experienced in our “good old days”. “

But there’s one thing we all depend on that won’t be as good as it was in the “good old days” anytime soon…

Kiss your returns goodbye

I’m talking about traditional sources of income.

In the “good old days,” a typical one-year bank CD (certificate of deposit) could easily earn 5-10% risk-free.

Today, you’re lucky to find a bank CD that yields more than 1%…and that’s over a five-year period.

The main reason is that interest rates have been set lower by Federal Reserve policy.

The Fed, however, is in a cycle of raising interest rates.

That means you’re committed to raising reference rates, which should also increase the returns on bank CDs you can invest in.

The rate-raising cycle began in 2015, and the Fed has now raised rates four times, including twice this year. At its next meeting next week, it is expected to announce the fifth rate hike of this cycle.

Many people think that just because the Fed is raising rates again we can go back to the “good old days” of 5% yields on your bank, but that’s simply not the case.

And the last tool that reminds us that we are not going anywhere near that level is the yield curve.

The yield curve

The yield curve is simply the difference between long-term returns and short-term returns. It flattens when the two get closer and expands when they widen.

If the higher short-term rates due to the Fed’s rate-raising cycle are to stick around, the long end of rates should also get a boost, but we haven’t seen that yet.

The one-year Treasury yield has skyrocketed. On a percentage basis, that’s an 800% increase, while the 30-year yield has barely been budgeted for.

That’s because investors are pricing in the effects of rising rates in the near term. They do not believe that inflation (the prices of goods) increases rapidly.

Without a pick-up in inflation, the expectation remains that longer-term yields will moderate.

And, in turn, that means your banks are in no rush to increase the yields on your certificates of deposit and savings accounts, leaving you dependent on alternative sources of income.