Banks Hoard Profits as CD Rates Lag Treasuries by 187 Bps

The CD rate curve is effectively broken, showing almost no incentive for savers to lock up capital long-term. The 12-month CD at 1.61% is the "peak" of the curve, as 24-month (1.41%) and 60-month (1.34%) rates actually offer lower yields, signaling that banks expect rates to fall further. Meanwhile, standard savings accounts are paying a pathetic 0.39%, and interest checking at 0.07% is essentially a zero-interest loan from the consumer to the bank. Across the board, these rates are falling or stagnant, even as the Fed maintains a restrictive stance.

The spread analysis screams one thing: avoid CDs at all costs. With the 12-month CD-Treasury spread at -187 bps, we are deep in "Strong Treasury Preference" territory, far beyond the -100 bps threshold where CDs become mathematically indefensible. Banks are signaling through these wide spreads that they have zero desire to compete for new deposits because they are already flush with liquidity. For a saver, choosing a 1.61% CD over a 3.48% 12-month Treasury is an unforced error that costs nearly 2% in annual yield.

Current 12-month CD rates sit at the 45th percentile of historical data, a middle-of-the-road figure that masks how much banks are winning right now. We have seen eight similar periods since 2023 where rates hovered around 1.61% to 1.86%, and the forward returns for bank stocks are nothing short of dominant. In these parallel periods, the Regional Bank ETF (KRE) posted a median 12-month return of +18.2% with a 100% positive hit rate. History suggests that when deposit rates are this "sticky" and low relative to the market, regional bank stocks are a coiled spring for investors.

This "Ultra Low" deposit regime is a massive tailwind for Net Interest Margins, particularly for money center giants like JPM and BAC that benefit from "lazy" core deposits. However, the market is currently punishing online-heavy players like SOFI (-22.7% over the last month) and ALLY (-6.1%), as these firms must pay higher rates to retain digital-first customers who are more likely to chase yield. In contrast, regional banks (KRE) are up 7.7% over the last month, proving that the market is beginning to price in the massive profitability of low deposit betas.

The Fed’s transmission mechanism is clearly stalled at the consumer level; while the Fed has cut rates by 69 bps YoY, banks have only lowered 12-month CD rates by 21 bps, effectively pocketing the difference. If the Fed continues to cut, expect banks to slash deposit rates instantly to protect their margins, while being much slower to lower lending rates. This dynamic makes monetary policy less effective at stimulating the economy but highly effective at subsidizing bank balance sheets.