Large retail time deposits and US Treasury securities (1986‐95): evidence of a segmenting market

Abstract

Argues that the similarities between US treasury securities (treasuries) and FDIC‐insured large retail certificates of deposit (CDs) should make their prices similar in an efficient market. Considers deposit pricing and substitutability between treasuries and CDs, citing previous research; and presents a study comparing their yields for three maturities using 1986‐1995 data. Presents the results and analyses further to explore the links between changes in treasury yields and lagged changes in CD yields; and upward CD yield stickiness. Finds that CD and treasury yield spreads changed from small and positive to large and negative over the period with little effect on deposit balances; and concludes that those investors who remained interested in insured balances during the early 1990s were either insensitive to interest rates or had high switching costs. Suggests that banks have used this unwillingness to migrate to non‐insured funds to decrease CD rates relative to treasuries for higher profits and asks how long this market segment will continue to accept inferior yields.

Citation

Gilkeson, J.H. and Porter, G.E. (1998), "Large retail time deposits and US Treasury securities (1986‐95): evidence of a segmenting market", Managerial Finance, Vol. 24 No. 8, pp. 26-47. https://doi.org/10.1108/03074359810765642