Banks “tend to look at equivalent duration in the wholesale markets” to price CDs, Adam Stockton, a director at the advisory firm Novantas, said in an interview. As wholesale rates dropped, “banks really started to price down” time deposits, particularly for longer-term maturities.
CD prices do not precisely track the wholesale yield curve, a concept that customers typically do not understand. Instead, depositors generally expect to be compensated with higher rates for tying up their money for longer periods — in technical terms, they demand high term premiums. Once premiums over liquid accounts flattened, CDs ceased to be attractive for most depositors. Customers made the calculation that “if CD rates are only five basis points better than what I could get in a savings account, I would rather keep my money in a savings account,” Stockton said.
When rates were going up, banks used time deposits to capture rate-sensitive balances without increasing yields on a broader portfolio of accounts, Stockton said. “The alternative would have been to increase rates substantially on savings accounts, which would have involved pricing up a much larger tranche of customers.”