As I stated a few weeks ago, while I posted all those 5%+ CD deals from 12-60 months, the spreads between CDs and treasury notes were unusually high and they would revert back to their normal 40 basis point spreads. Some banks needed to raise liquidity before the end of quarter so they "stepped in front of the line" to get their CDs sold with higher coupons. If you look at the issue sizes of each CD, they were pretty large. Investors are doing a lot of cash sorting now. They are moving money out of savings and checking accounts that pay next to nothing in interest and are moving to treasury money market funds and CDs. Investors were also selling into the equity market rally and exiting equity and bond funds last week and moving into money market funds. The surge in inflows into treasury MM funds is pulling short term yields down and the flight to safety trade is pulling intermediate and long term yields down. Remember that those bond traders that are locking in low long term yields are not risking their own money but "other peoples money". The market is once again betting that the Fed will cut interest rates starting in June despite all Fed members communicating that there will be no rate cuts in 2023. We will understand better where we are headed as banks start to report next week. The large banks were initial beneficiaries of depositors fleeing small and regional banks but they depositors are also doing their own cash sorting. Things will not stabilize for several months. We have a debt ceiling decision coming up and while there is no doubt that the debt ceiling will be raised, the country cannot continue to run with trillion dollar plus budget deficits. So there is a high probability that there will be another debt downgrade in the near future unless the market sees a serious effort to balance the budget. The probability of that happening is pretty low. A debt downgrade will push treasury yields up and CDs, and corporate bonds will follow.
