How Yield Curves Affect CD Rates

Yield curves measure the cost of borrowing money for different durations. CDs, or certificate of deposits are investment opportunities where the rate of return is typically affected by the length of investment and the current market rates.

Overall the yield curve is a barometer for economic growth. Investors tend to like it when the yield curve is normal, as traditionally it gives a backbone to economic growth. Under regular circumstances the longer it takes for a CD to mature, the greater the yield on the investment and that helps show a stabilized economy. However, there are times when shorter term CDs have a higher rate of return than longer term CDs, which is then called an inverted yield curve.

Yield curves when drawn on a graph, is the line drawn reflecting the interest rate of many types of investments, including CDs. Yield curves do not really affect a CD rate, but can show a pattern of growth, stagnation or inversions. However, what this line should show is that the longer the length of a CD, the higher interest it will earn. With a traditional yield curve, like the one you hope to see when tracking your investments, you hope to see the line get higher on the graph over the time period plotted out.

However, sometimes the yield curve is steep and in the CD market and markets across the board, the belief is that there is an expanding economy. General, that means that a larger than normal premium is being asked to invest their money for longer periods of time. Ultimately, yield curves tracks the interest on CDs but does nothing to affect the CD rates.