What factors might influence the effect of a US default on CD rates?

[TyrannicalDuncery]

I don't pretend to know what I'm talking about, so this is not financial advice or economics advice. I also know that nobody should make financial decisions based on what some dorks (<3) on the internet say. I'm asking for general advice as a small part of some potential decisions I might make about what to do with a tiny fraction of my budget. Okay, so:

If there is a US default event related to the debt ceiling, how might that affect CD rates? What factors might affect the answer?

Here are my random thoughts that I just pulled out of my butt. I'd be interested to know whether I'm thinking about this right, but this is kind of garbage so feel free to ignore it:

1. We don't know whether this would even really happen, and we don't know how financial markets might respond. They might think it doesn't matter, they might have already "priced it in," whatever.

2. One possibility is that treasury yields might go higher than they otherwise would.

3. Another possibility is that the economy would contract/slow (or be expected to contract), and that might push yields back down.

4. Higher treasury yields might raise CD rates, but the higher perceived risk of treasuries might also keep them from rising too much.

5. For shorter-term CDs, the effect might be smaller, because changes in perceived default risk might mostly affect longer-dated treasuries.

Not sure I used the right terminology.

[longtimelurker]

Not quite an answer to the question, but I suspect that if there were a real US default, the impact on CD rates would be low down the list of concerns for most people!

[TyrannicalDuncery]

Indeed

I would say that "low down on the list of concerns for most people" is a pretty good summary of this whole sub xD! I love you dorks.

[MeredithLepore]

Most experts think it would be "catastrophic" economically if the debt ceiling isn't raised... that said, you're right; we have no idea what will happen. In terms of CD rates, though, my bet is that they would increase as interest rates would likely spike.

[ForwardLooking]

Dusting off my old books on CD ladders from the 80's now!  LOL

[FireMedic1]

Pfft. Im more worried about my 401 tanking any more than it has.

[Anonymalous]

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@longtimelurker wrote:

Not quite an answer to the question, but I suspect that if there were a real US default, the impact on CD rates would be low down the list of concerns for most people!

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The last time the U.S. defaulted on their payments (1979), it just caused a bobble. The 1934 liberty bond default was a much bigger deal, but it was largely lost in the Great Depression.

Remember, we're not talking about a compete repudiation of all debts. That's so far off the table it's basically inconceivable, yet it's exactly what most people think when they hear the word "default". If the U.S. does default, it just means they're going to be late on a few interest payments.

The market might react very strongly for a couple days, especially with the ridiculous amount of doom and gloom the press has been selling, and rates will be suppressed for short term debt instruments. And it's likely to affect the U.S.'s credit rating, which could raise the interest the U.S. has to pay on new debt. But that's hardly catastrophic.

Also, short term, it's unlikely they'll run out of money on the magic date, anyway. Nobody knows how much money is rolling around the government. It's not just the Defense Department, which has been in the news lately for  yet another failure to pass their audit. Every major department of the government fails, all the time. They'll find some extra cash.

[ptatohed]

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@TyrannicalDuncery wrote:

I don't pretend to know what I'm talking about, so this is not financial advice or economics advice. I also know that nobody should make financial decisions based on what some dorks (<3) on the internet say. I'm asking for general advice as a small part of some potential decisions I might make about what to do with a tiny fraction of my budget. Okay, so:

If there is a US default event related to the debt ceiling, how might that affect CD rates? What factors might affect the answer?

Here are my random thoughts that I just pulled out of my butt. I'd be interested to know whether I'm thinking about this right, but this is kind of garbage so feel free to ignore it:

1. We don't know whether this would even really happen, and we don't know how financial markets might respond. They might think it doesn't matter, they might have already "priced it in," whatever.

2. One possibility is that treasury yields might go higher than they otherwise would.

3. Another possibility is that the economy would contract/slow (or be expected to contract), and that might push yields back down.

4. Higher treasury yields might raise CD rates, but the higher perceived risk of treasuries might also keep them from rising too much.

5. For shorter-term CDs, the effect might be smaller, because changes in perceived default risk might mostly affect longer-dated treasuries.

Not sure I used the right terminology.

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I am not totally sure I understand the question.  What do you mean by 'US default on CD rates'?  Are you asking if you have a CD at Bank X and Bank X fails, are you guaranteed your CD value?  Yes so long as the CD is under $250,000 and insured by the FDIC (or NCUA) which most all CDs are.  Or are you asking if you have a current CD at, say, 4.5% and rates go down, are you guaranteed the 4.5% rate for the rest of the CD term?  Sorry, not sure what you are asking.